Foundation notes

A Documentary Credit, commonly known as a Letter of Credit (LC), is a financial instrument used in international trade to ensure payment between buyers and sellers through the involvement of banks. It is a written undertaking by the buyer’s (issuing) bank to pay the seller (beneficiary) upon the presentation of specified documents that comply with the terms outlined in the LC. The main parties involved include the applicant (buyer), beneficiary (seller), issuing bank, advising bank, and sometimes a confirming bank. LCs can be revocable or irrevocable, confirmed or unconfirmed, and payable either at sight or on a future date (usance). The process typically involves the buyer requesting an LC, the seller shipping goods, and payment being made after the documents are verified for compliance. Required documents often include a commercial invoice, bill of lading, certificate of origin, and insurance certificate. LCs offer protection to exporters by guaranteeing payment and to importers by ensuring goods are shipped before payment is made. These instruments are governed by international rules such as the UCP 600 issued by the International Chamber of Commerce.