DOCUMENTARY LETTER OF CREDIT (DLC)
IRREVOCABLE - AT SIGHT
SWIFT MT700
WHAT IS A DOCUMENTARY LETTER OF CREDIT? (DLC)
Sellers/Exporters and Buyer/Importers usually require an intermediary such as a bank or financial institution to guarantee payment as well as the delivery of goods.
This is where the Documentary Letter of Credit (DLC) comes in.
A Documentary Letter of Credit (DLC) or At Sight Letter of Credit (Sight LC) is a financial instrument, issued by banks or trade finance institutions through a SWIFT MT700 message, where seller/exporters receive payment from the buyer/importer, once the terms specified in the DLC are completely fulfilled.
Once the terms specified in the Documentary Letter of Credit (DLC) are fulfilled and the buyer/importer cannot pay, then seller/exporter can make a compliant document presentation to demand payment.
When the seller/exporter makes a compliant presentation, the issuing bank or financial institution will make a payment to the seller/exporter.
Documentary Letters of Credits (DLC) are mostly used in international business transactions, where the buyer/exporter and seller/importer have yet to build a close business relationship and/or are located in different countries.
When closing a business deal with a buyer/importer in a foreign country, the seller/exporter is exposed to certain risks including international legal systems and a lack of trust with the buyer/importer.
Dues to this, a seller/exporter can be hesitant do such a deal without a Documentary Letter of Credit (DLC) from a trusted credit-worthy bank or financial institution as financial security.
HOW DOES THE DOCUMENTARY LETTER OF
CREDIT (DLC) PROCESS WORK?
The parties involved in issuing a Documentary Letter of Credit (DLC) are the seller/exporter (beneficiary), the issuing bank or financial institution, the buyer/importer (applicant) who is also the bank's or financial institution's client, and usually an advising bank of whom the seller/exporter (beneficiary) is a client.
A Documentary Letter of Credit (DLC) requires that the seller/exporter (beneficiary) present certain documents before the letter of credit's expiration.
These specific documents are directly related to the contract between the seller/exporter (beneficiary) and the buyer/importer (applicant), as they show the issuer that the seller/exporter (beneficiary) has completely fulfilled his/her side of the deal.
Once the seller/exporter (beneficiary) makes a compliant presentation, the issuer (bank or financial institution) pays the beneficiary even if the buyer/importer doesn't want to pay.
The Documentary Letter Of Credit (DLC) Process:
Step 1: Application
Complete and return the DLC application with the documents from your deal (Pro Forma Invoice, SPA, Contract, etc.).
Step 2: Draft
We will create a FREE Documentary Letter of Credit SWIFT MT700 draft for you and your sell/exporter to review and confirm.
Step 3: Draft Review & Opening Payment
Once you and your seller/exporter have finalized the DLC draft (changes to the draft are free of charge) and are ready to obtain the DLC, you then wire the opening fee to our bank according to the pro forma invoice sent to by us.
Once we have received the wire, we will release the finalized Documentary Letter of Credit (DLC) to the bank or financial institution for issuance by SWIFT MT700.
Step 4: Issuance
In most cases, the bank will issue the DLC within 48 hours of release. Once the DLC is issued, we email you a copy of the Documentary Letter of Credit as it is transmitted by a MT700 SWIFT message to the beneficiary, including the DLC reference number.
Your seller/exporter will be able to confirm receipt of the DLC transmission shortly thereafter.
Step 5: Presentation of Documents
Once the seller/exporter has prepared and loaded all goods for shipment, they must send the specified documents for that particular shipment to their own bank (the advising bank).
Their bank will then forward the documents to our bank (the issuing bank), and we will email you copies of the presentation and all of the documents that were submitted by the seller/exporter for your review and approval.
Step 6: Payment of Goods
Before our bank can release the original documents, we must receive payment for the presentation. Once we have received payment, we cosign the documents to you and overnight them to your freight forwarder or to whomever you wish.
This completes the transaction.
The Documentary Letter Of Credit (DLC) is governed by a set of guidelines known as the Uniform Customs and Practice (UCP 600), which was first created in the 1930s by the International Chamber of Commerce (ICC).
WHAT ARE THE BENEFITS OF A DOCUMENTARY LETTER OF CREDIT? (DLC)
FOR YOU (THE BUYER/IMPORTER)
If you don't have the necessary collateral requirements or a good relationship with a bank to receive a letter of credit—we do.
There is no need to leave a down payment or deposit with your seller/exporter since your Documentary Letter of Credit (DLC) will be opened for the entire amount of the contract. This will free up capital in your business and will lower your risk in the transaction. The seller/exporter can often borrow against the DLC to receive their money faster.
You can protect yourself even further by adding safeguards into the Documentary Letter of Credit (DLC) including quality control, inspection of goods, and set delivery and production times.
You may open up all types of new opportunities to do business with foreign companies by strengthening your financial position with your seller/importers.
FOR THE BENEFICIARY (THE SELLER/EXPORTER)
As long as you stick to the terms and conditions of the Documentary Letter of Credit, payment is guaranteed.
You are protected against the buyer not being able to pay or going bankrupt. The issuing bank takes on the credit risk when they issue the DLC.
Lower your collection time on receivables since the DLC accelerates payment of goods sold.
You will have an easier time receiving bank financing as you can often use the Documentary Letter of Credit as collateral.