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Documentary Letter of Credit

High quality payment security for commercial transactions.

The Documentary letter of credit is intended for:

  • Clients who deal in commercial transactions

Characteristics of the Documentary letter of credit:

  • a written obligation on the part of the bank to pay a specified amount subject to meeting of the  conditions of the letter of credit stipulated by the buyer
  • the bank assumes the obligation towards the seller on the basis of request by the buyer
  • an irrevocable obligation
  • various types of letters of credit:
    • import, export (customer, supplier)
    • notified, confirmed
    • transferable, revolving, standby letter of credit
  • one of the most important and best elaborated payment instruments
  • used in international and domestic trade
  • certainty for the buyer that  payment of a specific amount will not be made until the seller meets the conditions set by the buyer
  • certainty for the seller that he or she will be paid for the goods after the conditions of the letter  of credit are met

The specific functioning of the letter of credit can be seen in the following diagram:

The specific functioning of the letter of credit

1 – A purchase contract is concluded between the exporter (seller) and the importer (buyer)
2 – On the basis of the purchase contract and its conditions, the importer asks his or her bank to open a letter of credit
3a – The exporter sends the goods
3b – The exporter collects documents pursuant to the conditions of the letter of credit and sends them via his or her bank to the importer's bank, which checks them and in the conditions have been met, hands them on to the importer.
4 – The importer's bank (issuing bank) pays out the letter of credit and debits the importer's account.

Advantages of the Documentary letter of credit:

  • for the party ordering the letter of credit (buyer):
    • certainty that the goods were dispatched before payment
    • possibility of limiting commercial risk to a minimum by setting conditions for the letter of credit
    • possibility of gaining more favourable pricing conditions thanks to provision of high quality payment security provided to the business partner
    • motivation for the seller to implement the delivery at the agreed time and in line with the conditions of the letter of credit
  • for the recipient of the letter of credit (seller):
    • certainty of payment for the delivery of goods or services once  the conditions of the letter of credit are met
    • certainty that payment of the agreed amount is bound to meeting of conditions, which are known in advance
    • improvement of liquidity – the seller can gain funds immediately if he or she sells his receivable to the bank (for transactions with deferred maturity)
    • possibility of using a high quality letter of credit as a guarantee towards the  seller's own suppliers

The Documentary letter of credit allows:

  • high quality payment security for both parties involved in the commercial transaction

How to get a Documentary letter of credit?

  • contact your relationship manager
  • call the regional Trade Finance specialists – contacts can be found on the map below 
  • call the free KB Info line on 800 521 521

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