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 buyer
The buyer will improve its working capital since payment will be made after the goods have been shipped
The buyer might get longer credit terms from the seller
The buyer can be certain that the seller will only get paid after they have met the terms of the L/C
The buyer applies for an L/C, either by filling in the application form or electronically in Trade Finance Global (Nordea's e-solution for Trade Finance transactions).
After credit approval, the bank issues the L/C in favour of the seller.
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