Financial instruments

Documentary Credits/Bank Guarantee

Documentary Credits

The documentary credit is one of the most secure payment methods in international trade, offering the exporter a conditional payment guarantee from the importer’s bank and/or securing payment in various transactions.

Exports

Using documentary credits when you export goods or services means the importer’s bank commits itself to paying you provided that the conditions of the credit
have been met.

Advantages of export documentary credits

• Payment is guaranteed by the importer’s bank prior to shipment.
• Enhanced security of on-time payment.
• Enhanced security that the order will not be cancelled or changed without your approval.
• Improved liquidity, as payment can often be released shortly after shipment.
• Various financing options may be available which include enhanced levels of protection.

Imports

Documentary credit is one of the most secure payment methods in international trade, offering the exporter a conditional payment guarantee from the importer’s bank.

As an importer, using documentary credits to pay for goods or services offers you several commercial and operational advantages.

The security of this payment method should be more appealing to the seller and you may be able to negotiate discounts as a resul have been met.

Bank Guarantee, Standby Letter of Credit (SBLC)

A conventional documentary credit is issued to provide the seller with an undertaking of payment upon the seller’s submission of documents in accordance with the terms and conditions of the credit after shipment has taken place.

A standby documentary credit, on the other hand, is an undertaking which is activated only if something goes wrong between the buyer and the seller and the expected payment does not take place. It therefore allows the seller to enforce a claim.

International Rules

Documentary credits are subject to a set of international rules entitled Uniform Customs and Practice for Documentary Credits (UCP), ICC Publication No. 600.

The rules are set forth by the International Chamber of Commerce (ICC) in Paris and are used by most banks worldwide.

ISBP

In May 2000, the ICC appointed a task force to streamline international banking practice for documentary credit practitioners when checking documents.

The resulting guidelines – International Standard Banking Practice for the Examination of Documents under Documentary Credits (ISBP) – were intended to reduce the number of documents being rejected dramatically by encouraging a uniformity of practice worldwide. The ISBP was approved in 2002 and revised in 2007, making the documentary credit process easier and even more secure.

ISP98

Standby letters of credit are usually subject to the same rules as commercial documentary credits, that is, UCP 600. But a growing number of standby documentary credits are subject to a newer set of rules, known as ISP98, which deals solely with this type of documentary credit.

If your standby documentary credit is subject to ISP98, this must be shown in the documentary credit.

Get in touch with us for further details