Documentary Letter of Credit (L/C, DLC)
Letter of Credit (Documentary Letter Of Credit (L/C, DLC) is the bank’s obligation to pay the seller of goods or services a certain amount of money in the timely submission of documents, confirming shipment of goods or performance of contractual services.
DLC is one of the most important means of financing in the international trade, since the letter of credit is a tool that removes most of the risks from the buyer (importer) and from the seller (exporter). DLC is a very flexible and convenient tool of calculations, which have the widest recognition and acceptance in the world.
There are several forms of Letters of Credit:
Revocable Letters of Credit can be changed or cancelled by the issuing bank without prior notice to the recipient of funds. Revoking the letter of credit does not create any obligation from the issuing bank to the payee. The nominated bank is obligated to make a payment or other operations on a revocable letter of credit if at the time of their commission they have not received notice of the change of conditions or cancelled credit. A letter of credit is revocable if its text does not explicitly state otherwise.
The Irrevocable Letter of Credit is a firm obligation of the issuing bank to pay money in the order and terms defined by the conditions of the Letter of Credit, if the documents provided for by it, submitted to the bank are specified in the credit. The Irrevocable Letter of Credit guarantees that the exporter will make payment to the performance of its obligations, even if an importer wants to abandon the deal. Therefore, exporters, performing a special order for which most likely there will not be another buyer, choose this kind of letter of credit.
Irrevocable Unconfirmed Letter of Credit. When making an unconfirmed letter of the credit, the issuing bank providing a letter of credit is the only party responsible for the disbursement to the seller. The nominated bank has to pay only after receiving the money from the issuing bank. The nominated bank simply acts on behalf of the bank providing credit, therefore it does not take any risk.
Irrevocable Confirmed Letter of Credit The obligation of the issuing bank is confirmed by another bank. Confirmation is an additional guarantee of payment from another bank (bank of the exporter or prime bank).
The bank that confirms the letter of credit is committed to paying for documents, according to the conditions of the letter of credit if the issuing bank fails to make the payment.
Currently, LC issuance is governed by the latest version of UCP 600.