Documentary credit - LETTER OF CREDIT (LC) is the bank’s commitment to the seller (beneficiary), against agreement and instruction of Debt Collection (order, importer), pay-per-vista or through a certain period (stated in LC agreement), in accordance with agreed conditions and after presenting required documents. LC must be issued as written document. LC is widely accepted as an instrument of payment on international trade market, because it is the safest, in the sense that equally protects the interests of buyer and seller. Seller - LC user, is sure that after presentation of requested documents, bank will make the payment for sold goods or services performed. On the other hand, the interests of the customer are also protected as LC becomes active and chargeable only after the presentation of requested documentation (documents that proves delivery of goods was executed under agreed condition).
There are few main categories or types of LC, depending on the classification criteria. In relation to the possibility of cancellation:
- Revocable LC - The category that allows to the buyer to revoke LC at any time. That provides to the buyer insufficient security because he might be in a situation that he is not informed about the LC revocation in the moment when goods are already delivered. Although this type of Debt Collection provides a minimum security for the seller, it is acceptable when the seller has confidence in customer-buyer based on the correct long-term cooperation. It is often in use, because issuing procedure does not require much time and complicated analysis. - Irrevocable LC is a strong obligation to the bank to pay the buyers debt when required documents are presented (documents that confirms that turnover of goods or services was performed under the arranged conditions). Issuing procedure is longer and more complicated, but once if it is issued with the consent of all Debt Collection participants, could not be revoked. That principle offers maximum security to the vendor.