Here the bank will not deal with goods but only the documents. For importers, a Letter Of Credit provides the surety that the buyer will make the payment only after receiving the evidence from the supplier about the shipment of goods. It also helps in avoiding advance payments or deposits to the supplier thus conserving your cash flow. It improves your creditworthiness. For exporters, a Letter Of Credit ensures that they will surely receive the payment even if the buyer fails to pay for the goods shipped. In such cases, the buyer’s bank covers the outstanding payment.

A Documentary Letter Of Credit also known as a regular or primary letter of credit is the most commonly used letter of credit. It is a legal document from a financial institution or bank stating a promise to pay the holder if the holder fulfills his commitment. It provides a guarantee of payment to the seller by the bank in case the buyer fails to make the full or remaining payment of the goods purchased. One of the best advantages of a Commercial or Documentary Letter Of Credit is it helps in easing international trade and ensures the seller against payment risk, thus creating strong and trustworthy relationships. The importer is able to increase its liquidity as the bank takes over the commitments made by the buyer. Standby Letter Of Credit(SBLC) also known as standby credit is also used to ensure the payment by the buyer’s bank to the beneficiary in case the buyer fails to make the payment. It is issued by the bank to show that the customer or buyer is liable to make the payments as per the terms of the agreement. It is a secondary payment tool and provides additional support to a customer’s financial status. The beneficiary can draw the amount by providing SBLC as evidence in case the customer fails to meet their obligation.

Documentary Letter Of Credit and Standby Letter Of Credit are similar in some aspects. Both are statements from the bank but Documentary Letter Of Credit is a primary payment method which means the buyer’s bank will pay directly to the seller just after he makes the complying presentation whereas Standby Letter Of Credit are secondary payment method which means they act as a guarantee and will be used in case other primary payment option do not work.

For more information visit our website: https://merchantcreditcorp.co/

Merchant Credit and Guarantee Corporation Limited (MCG)

Phone: +64 9 5244269
Email: [email protected]