A Documentary Credit (“D/C”) also known as Letter of Credit (“L/C”) is a method of payment where the buyer’s bank guarantees payment to the seller with the condition that the seller has to fulfil the terms specified in the L/C.
Benefits for the seller
- The seller reduces the risks of not getting paid
- The seller will improve its working capital – by presenting documents to Nordea soon after shipment of the goods payment is made within a few days
- The seller can offer longer payment terms (credit) to the buyer and still get paid quickly, by selling the receivables to Nordea
- Eliminate the risk related to the buyer's bank and country with a confirmation (guarantee) of the L/C by Nordea.
- The banks involved will act according to the internationally accepted rules of the International Chamber of Commerce.
The buyer applies for an L/C with its bank. We recommend that the seller takes part in drafting of and agrees to the terms of the L/C on beforehand.
We recommend to use L/C when the trade relationship is new or the value of the trade is significant.
The same goes for when the goods are made to order or if it is a project delivery where payments are made as the work progresses or deliveries are made.
Through Trade Finance Global (Nordea's e-solution for Trade Finance transactions) you will receive and handle your export L/Cs electronically.
After presentation of documents that fulfil the terms and conditions of the L/C the seller gets paid, and the buyer pays when receiving the documents from its bank.
The seller offers the buyer longer payment terms which means that the buyer will pay and the seller gets paid at the end of the credit period.
The seller may be able to sell the receivables to its bank.
- Buyer/importer = Applicant
- Seller/exporter = Beneficiary
- Buyer's bank = Issuing Bank
- Seller's bank = Advising/Confirming Bank