What is letters of credit?

Letter of Credit is an undertaking issued by the buyer's bank to pay a specified sum of money to the seller provided credit conform documents evidencing the supply of goods described in the Letter of Credit are presented to the bank.

Letters of credit can be processed according to the following international rules:

The International Chamber of Commerce (ICC) has issued the rules ICC Uniform Customs and Practice for Documentary Credit 2007 Revision, Publication No. 600, abbreviation UCP 600, that regulate the processing of documentary credit.

Terms used for documentary credit in English: documentary credit, letter of credit, LC, DC.

The Documentary Payments Department of Swedbank has been offering professional and top level documentary credit services to its clients for years. Two internationally certified documentary credit specialists (CDCS) also work in the department.

You can also read more about documentary credit in the Swedbank brochure Documentary Credit, Collection and Bank Guarantees.

Course of Documentary Credit Transactions

1. First of all, the buyer and the seller agree that documentary credit will be used to pay for the goods.
2. The buyer then contacts its bank and requests that a documentary credit is opened in favour of the seller. Since the bank guarantees that a payment is made to the recipient when a documentary credit is opened, it must make a credit decision about the buyer before issuing the documentary credit.
3. The buyer’s bank sends a message about opening a documentary credit to the seller’s bank, who will notify the seller thereof.
4. The seller ships the goods and submits the accompanying documents of goods to its bank.
5. The seller’s bank sends the documents by courier to the buyer’s bank. Once the compliance of the documents has been ascertained, the buyer’s bank pays money to the seller or makes the promise to pay it on the payment date. The accompanying documents of goods are then handed over to the buyer.

Confirmation of Export Documentary Credit

When a documentary credit is confirmed, Swedbank and the opening bank both assume the obligation to pay the recipient of the documentary credit for the goods if the recipient of the documentary credit has performed all the conditions of the documentary credit.

Confirmation of documentary credit is useful, because

• it makes it possible to avoid the political and other risks of the opening bank or the country of its location;
• the seller can consider the transaction completed for itself after receiving the money from Swedbank;
• it allows for discounting documentary credit with payment deadlines, i.e. the recipient of the documentary credit can receive the money expected under the documentary credit before the arrival of the payment deadline, if requested.

Documentary credit can be confirmed if

• a relevant limit has been established for the opening bank in Swedbank,
• the terms and conditions of the documentary credit are suitable for Swedbank,
• the recipient of the documentary credit is a long-term documentary credit client of Swedbank.

Standby Documentary Credit

Standby documentary credit is a guarantee issued in the format of a documentary credit. Standby documentary credit are processed according to the documentary credit rules (UCP 600) or the rules created specially for processing standby documentary credit (ISP98).

Transferable Documentary Credit

Transferable documentary credit gives the recipient of the documentary credit or the intermediary the opportunity to purchase goods from a supplier with the same documentary credit it uses to resell the goods to the buyer. The buyer’s bank opens a transferable documentary credit in favour of the intermediary for this purpose. The banks sends a transfer message to the supplier or the second recipient of the documentary credit. The message lists all the initial terms and conditions of the documentary credit, excl.

• the amount of the documentary credit,
• the unit price,
• the expiry date of the documentary credit,
• the deadline for submission of documents,
• the delivery deadlines.

All these can be changed by the intermediary.

It is important that:

• the buyer and the seller both know that they are communicating with an intermediary,
• the goods move directly from the seller to the buyer.