How documentary credit works

#1 Contract is signed between buyer and seller, stipulating that payment is to be made by documentary credit.

#2 Buyer requests a documentary credit be issued. Buyer (applicant) asks his bank (issuing bank) to issue a documentary credit in favour of seller (beneficiary), not requiring confirmation by seller’s bank, and specifying the documents required to import the goods.

#3 Buyer’s bank verifies buyer’s creditworthiness. Issuing bank checks buyer’s creditworthiness and verifies the signatures on the documents to ensure they are valid, and then makes sure the instructions are clear and complete.

#4 Buyer’s bank issues documentary credit. Buyer’s bank issues the documentary credit and forwards it to seller’s bank through the SWIFT network. Buyer receives a copy of the message.

#5 Seller’s bank examines documents. Seller’s bank (advising bank) verifies the authenticity of the documentary credit and examines the documents to make sure they follow UCP (Uniform Customs and Practice) rules. It also checks the instructions to ensure they contain no errors.

#6 Seller is notified. Advising bank informs seller (beneficiary) that it has received a documentary credit in his favour.

#7 Seller verifies documents. Beneficiary verifies that the terms and conditions stipulated in the documentary credit match those set out in the sales contract. If beneficiary disagrees with any of the terms or conditions, he must ask the buyer to amend the terms.

#8 Goods are shipped. Seller ships the goods and prepares the documents requested in the documentary credit instructions.

#9 Seller presents documents to his bank. Seller presents the documents to his bank.

#10 Seller’s bank examines documents. Seller’s bank verifies that all documents presented comply with the documentary credit terms. Any errors may result in seller not being paid.

#11 Seller’s bank forwards documents. Seller’s bank forwards the documents to buyer’s bank with a request for payment.

#12 Buyer’s bank examines documents. Buyer’s bank in turn verifies the documents to ensure they comply with the documentary credit terms.

#13 Buyer’s bank forwards payment. If the documents comply with the terms, buyer’s bank forwards payment to seller’s bank, less applicable fees.

#14 Account is debited and documents delivered. Buyer’s bank debits buyer’s account for the amount of the documentary credit less applicable fees and delivers all documents to him. Buyer can then clear the goods through customs and take possession of them.

#15 Seller receives payment. Seller’s bank credits payment amount to seller’s account, less applicable fees.