FINANCING EXPORTS: LETTERS OF CREDIT
The expressions ‘documentary credit’ and ‘letter of credit’ are used interchangeably to refer to the most frequent and most secure facility for financing international trade. The security aspect of a documentary credit rests upon the fact that it represents an undertaking by the bank issuing the documentary credit at the request of its customer (usually the buyer of goods), to pay the beneficiary (usually the seller of goods), a specified amount on condition that the beneficiary presents to the bank stipulated documents. These documents evidence, among other things, the shipment of goods within a prescribed period of time. The bank thus acts as an intermediary between the buyer and the seller, satisfying the competing interests between them, and removes the risk of each party to the commercial transaction. While the bank guarantees payment to the seller for the goods, it protects the buyer by ensuring that no payment is made to the seller until the latter has shipped the goods, delivered the relevant documents, and otherwise complied with the prescribed conditions.