DOCUMENTARY LETTER OF CREDIT (DLC) - For Your Read

Documentary Letter of Credit (DLC) is a financial instrument used in international trade to facilitate the payment between the importer and exporter. A DLC is a written commitment issued by a bank on behalf of the importer (buyer) to pay the exporter (seller) a specified amount of money within a predetermined period, subject to the presentation of specific documents that comply with the terms and conditions of the DLC. In this article, we will discuss the significance of DLC in import and export businesses.




Why Use a Documentary Letter of Credit in International Trade?

In international trade, the seller wants to ensure that they will receive payment for the goods they have shipped, and the buyer wants to ensure that the goods they receive are in the agreed-upon condition. A DLC provides a secure payment method that guarantees that both parties will fulfill their obligations. The DLC serves as an assurance to the seller that they will receive payment for the goods and to the buyer that the payment will not be made until the goods are received as agreed upon.

How Does a Documentary Letter of Credit Work?

A DLC is a complex transaction that involves multiple parties, including the importer, exporter, banks, and shipping companies. The process begins when the importer (buyer) applies for a DLC with their bank. The bank will review the application and assess the creditworthiness of the importer. If the bank approves the application, they will issue a DLC in favor of the exporter (seller).

The exporter then ships the goods and presents the documents specified in the DLC, such as the bill of lading, commercial invoice, packing list, and certificate of origin, to their bank. The bank will verify the documents and send them to the importer's bank. The importer's bank will review the documents and ensure that they comply with the terms and conditions of the DLC.

Once the documents are verified, the importer's bank will release payment to the exporter's bank. The exporter's bank will then credit the exporter's account. If the documents do not comply with the terms and conditions of the DLC, the importer's bank may refuse to make payment, and the exporter will have to resolve the issue with the importer to obtain payment.

Benefits of Documentary Letter of Credit in International Trade

Reduces Risk: A DLC reduces the risk of non-payment for the exporter and the risk of receiving defective or substandard goods for the importer.

Ensures Compliance: A DLC ensures that the importer and exporter comply with the terms and conditions of the trade agreement.

Facilitates Trade: A DLC facilitates trade by providing a secure and reliable payment method that is recognized globally.

Increases Trust: A DLC increases trust between the importer and exporter, as both parties have the assurance that the other party will fulfill their obligations.

Conclusion

In conclusion, a Documentary Letter of Credit is a valuable tool in international trade that provides a secure and reliable payment method. The DLC ensures that the importer and exporter comply with the terms and conditions of the trade agreement, reduces risk, increases trust, and facilitates trade. As such, it is important for businesses engaged in international trade to understand the benefits and use of DLCs.


Arasan Trade Finance Consultant - + 91 9345516057

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