A documentary Letter of Credit is an agreement with banks, made by an importer, to pay an exporter, provided certain conditions are fulfilled. The importers apply to their bank to issue the credit in favour of their suppliers through a bank in the suppliers' country. If the importers wish to guarantee payment of the credit they ask their bank to issue an irrevocable credit. This means the credit cannot be exchanged without the exporters' and banks' agreement. A credit without such a guarantee is a revocable credit and can be changed by the importer. If, in addition, the importers want the advising bank in the sellers' country to guarantee the credit, they will request confirmation by the advising bank. The credit then becomes a confirmed irrevocable credit (see page 97). From the point of view of the exporters (the beneficiaries) this is the safest form of credit to have.
There are three kinds of credit payment.
1 A credit for payments of drafts is when D/P terms have been agreed and an advising bank pays drafts drawn by the exporters, or their bank, on itself, at sight.
2 An acceptance credit is when D/A terms have been agreed and the advising bank or another bank accepts drafts for payment after a period of time, e.g. 120 days after sight.
3 A credit with authorities to negotiate is when the confirming or issuing bank may make a bargain with the exporters for acceptance of a draft drawn in another currency.
Whichever form of credit is used, however, the bank where the Credit is available will only pay the exporters when all the shipping documents are correct according to the terms of the credit.
Source: articlesbase
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