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Documentary credit for Trade Finance

By using an Export Documentary credit, you can gain a considerable competitive edge, boost your cash flow and gain control of your risks. It can also serve as a financing instrument and is a globally used method of payment in international trade. Use the export documentary credit when your customer is situated in a country which is economically or politically unstable, or if the country's legislation or other statutes so require. The documentary credit can also be used to finance the term of payment. 

Your benefits 

  • You can get financing for your term receivables under certain conditions. 

  • Ability to finance your supplier credit with letter of credit as collateral, which means you can offer your customer longer credit without burdening your own liquidity. 

  • In an unconfirmed export documentary credit the buyer's bank undertakes to pay the receivable against credit conforming documents. This means that the risk related to the buyer is eliminated. 

  • Eliminate the risk related to the buyer's bank and country with an export documentary credit confirmed by Nordea. 

  • All documentary credits are issued following the international documentary credit rules (UCP 600). 

  • The banks involved will act according to the internationally accepted rules of the International Chamber of Commerce. 

  • You can offer credit and/or obtain financing.

A Documentary Credit helps your company to hedge against the risks related to exports trading. The buyer's bank issues an irrevocable payment undertaking to your company provided that your company presents to the bank documents conforming to the terms and conditions of the documentary credit during its validity.

The repatriation of sales receivables involves risks. Even if the buyer usually settles its payment liabilities without cause for complaint, unstable political and economic circumstances may affect the buyer's liquidity and ability to pay. The use of a documentary credit diminishes the risks related to a foreign buyer. It can also be used to finance the term of payment.

It is recommended to use a documentary credit when the trade relationship is new or the value of the trade is significant to the buyer or your company. The same goes for the manufacture of special goods made to order or a project delivery where the payment is made as deliveries are made or as the work progresses.

Through Trade Finance Global you will, among other things, be electronically advised of a documentary credit. 

At sight documentary credit

The seller will be paid after having presented documents conforming to the terms and conditions of the documentary credit.

Deferred payment documentary credit

A deferred payment documentary credit is used when the seller grants the buyer a term of payment. The seller will be paid when the term of payment has elapsed. The seller can request its bank to change the term of payment of a confirmed deferred payment documentary credit to a cash remittance. The bank then discounts the receivables related to the deferred payment documentary credit.

The parties to a documentary credit

A documentary credit usually has four parties: the buyer, the exporter and the banks of the before-mentioned parties. 

  • Seller/exporter = Beneficiary 

  • Buyer = Applicant 

  • Seller's bank = Advising/Confirming Bank 

  • Buyer's bank = Issuing Bank

Transferable documentary credit

When your company acts as an intermediary between the buyer and the supplier: a transferable documentary credit opened in your favour can be transferred to the supplier who then gains the security provided by the documentary credit. However, your company will still maintain the security of the original documentary credit.

Back-to-back documentary credit

Can be used when the original documentary credit is not transferable. In practice a back-to-back documentary credit means an import documentary credit opened in favour of the supplier. The terms and conditions of this documentary credit follow the original documentary credit opened in favour of the first beneficiary. The collateral issues of a back-to-back documentary credit will be solved with ordinary credit processing arrangements.

Revolving documentary credit

An alternative available to your company if your trading involves recurring long-term deliveries. The most significant advantage of a revolving documentary credit is often the security it brings to receiving payments for future deliveries. This diminishes the uncertainty of whether or not to begin production. A revolving documentary credit can revolve either in terms of time or amount.

 

Export standby letter of credit

Like a DC and a bank guarantee, a standby letter of credit is a very flexible instrument for all types of business. It can cover anything from an ordinary guarantee commitment to a more sophisticated financial instrument. It is normally used in order to secure the fulfillment of contractual obligations such as payments.  

When you and the buyer have agreed on the contract terms, you also need to define which of the terms are to be secured by a Standby Letter of Credit. If you have agreed to open a Standby Letter of Credit, the buyer has to contact his bank and request the issuance of the Credit. 

The Standby Letter of Credit comes in to practice when the buyer fails to fulfill his payment obligations, or to perform a job or meet some other commitment called for and stated in the commercial contract. The seller can then, on demand, present the stipulated documents stated in the Credit, and the issuing bank isobligated to make the payment, provided all terms and conditions of the credit complies with credit.   

Standby Letters of Credit - factsheet for exporters

Benefits of a Standby Letter of Credit

  • You secure compensation for non-fulfillment of any important obligations
  • You secure payment
  • You can obtain advance payment
  • You can offer credit and/or obtain financing
  • You only need to present documents to the bank when your buyer has failed to fulfill his obligations, making it easier for you to administrate

Get in touch 

For more information about how we can support your business contact your Nordea adviser..