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What are they?
An import documentary credit (or documentary letter of credit) is issued by the Importer’s bank to pay foreign suppliers for goods shipped, at the request of and in accordance with instructions from the buyer. When correctly used, they provide protection, convenience, and security to importers.
How do they work?
- You apply for an import documentary credit through the Bank
- Arrangements are made with a bank (issuing bank) in your supplier’s country
- You provide the bank with the name of your supplier (the beneficiary), a description of goods, documents required and other conditions
- Once your conditions are met, the bank gives instruction to advance funds in return for release of goods
- A line of credit is necessary, and the amount of the documentary credit will be applied against that limit
Benefits?
- Payment for the goods or services happens only when terms and conditions are met and the stipulated documents provided
- You may be able to negotiate better terms (such as pricing and longer payment)
- Offering documentary credit terms can attract more suppliers who are willing to ship, or ensure the supply of some commodities
Risks?
- A line of credit is necessary for new importers, and a portion of the established line of credit will be tied up
- Inclusion of unnecessary details in the credit can increase discrepancies, resulting in delays or complications
- The importer has assurance of the correct documents being received, but not necessarily the correct quantity or quality of goods
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