Export documentary credit

A documentary credit safeguards the position of both the seller and buyer and opens up opportunities for trade financing.

Documentary credit enhances working capital management for the seller and buyer

A Letter of Credit (L/C), also known as Documentary Credit (D/C), is a payment method where the buyer’s bank (issuing bank) undertakes to irrevocably make a payment to the seller after the seller has presented the documents under the documentary credit terms.  It is a safe and quick payment method because payment is not dependent on the buyer’s payment capacity at the time of payment. It is also an efficient way to minimise both parties’ risks relating to the term of payment.

A documentary credit is especially well suited when you do not know the counterparty well or the transaction concerns goods manufactured to order. Documentary credits are also often used when there is a large geographical or cultural distance between the business partners.

Opening a documentary credit

The business partners should agree on the terms of the documentary credit in advance. You can fill in the attached opening instructions and forward them to the buyer to ensure that the information is correct.  

When OP has received a documentary credit from the issuing bank, you will immediately be notified of it. Read the details of the documentary credit carefully and ask for revisions, if needed.

Present the documents required in the documentary credit to OP which checks that they comply with the terms of the documentary credit. Your company will receive payment in accordance with the undertaking of the issuing bank and/or confirming bank, if any.

The terms of the documentary credit are based on the sales contract and can be agreed freely between the parties. However, the documentary credit is detached and separate from other agreements. The fulfilment of the terms is verified from the documents required in the documentary credit. It is advisable to agree on the distribution of costs already in the sales contract.

The Uniform Rules of Documentary Credits issued by the International Chamber of Commerce apply to documentary credits.

Read more about confirmed export documentary credits

A confirmed documentary credit is an undertaking given not only by the issuing bank but also the seller’s bank to pay when the seller fulfils the terms of the documentary credit.

In addition to buyer risk, the confirmed documentary credit protects the seller against the financial and political risks associated with the trading partner’s country and bank. When confirming the documents, the confirming bank undertakes to pay the exporter and thereby bear the counterparty’s country, bank and document risks.

The seller should check beforehand whether the documentary credit can be confirmed as the bank is not obligated to confirm the documentary credit.

Financing alternatives for documentary credits

Discounting

Documentary credits can be utilised as a competitive tool in trade by granting payment time to the buyer. A confirmed documentary credit with a payment period can be discounted without side collateral, after which the seller receives its receivable against presenting to the bank the documents specified in the terms of the documentary credit.

In addition to documentary credit fees, discount interest and a discount margin are charged. The costs for the payment time can be included in the transaction price.

Post Financing, finance by issuing bank

The financing is realised after the exporter has presented the documents under the terms of the documentary credit. The payment is remitted to the seller when the documents are presented.

The foreign buyer is given the payment time it needs without the seller being exposed to the interest rate and currency risk at the payment time.

The buyer is liable for the financing costs. The banks agree on the cost of financing and maturity before the documentary credit is opened.

Post Financing is a widely used financing method in many countries, such as Turkey and India.

Standby documentary credit – safeguarding payments for regular deliveries

A standby documentary credit is a bank guarantee in the form of a documentary credit on fulfilling the customer's obligations.   A standby documentary credit is lodged as collateral and is not meant as a payment method in contrast to a commercial documentary credit.

Standby documentary credits are often used to secure the payments for regular deliveries and to pay loan principals and interest as well. In addition, they are used especially in North and South America and some Southeast Asian countries instead of bank guarantees.

If you do not know the issuing bank, request a confirmation for a standby documentary credit from us.

Have a look at documentary credit online service

By using our documentary credit online service, you can speed up the preparation of documentary credit documents and streamline your company's internal processes. The service offers modern solutions for processing documentary credits and transmitting real-time data as well as different kinds of reports for monitoring purposes. The checks made by the application reduce the number of errors.

You can open and change export documentary credits and receive payment receipts and reports directly to your workstation. Through the service your company can also open and change import documentary credits.

To start using the service, sign an agreement on eServices with OP.