What is a Documentary Credit?
A documentary credit is a method of payment that protects both the seller (exporter) and the buyer (importer) in a contract of sale. In the case of the seller, it gives a guarantee (usually issued by the buyer’s bank on his request) that the seller will receive payment after the shipment of goods had been fulfilled. On the buyer’s side, however, the buyer gets a guarantees that goods ordered will be delivered.
Generally, the seller requests the documentary credit in order to check the credit worthiness of the buyer. The buyer, upon issuing the requested document, also requests confirmation or compliance documents from the seller. The confirmation documents could be a bill of lading, insurance certificate, certificate of origin, et cetera.
At the fulfilment of the agreed terms in the contract by both parties, the buyer gets his goods and the seller gets paid. In some part of the world, documentary credit is also known as a letter of credit (L/C).