A documentary letter of credit is issued by an authorized bank of a financial organization. It gives guarantee to the supplier that they will receive payment up to the amount how they wrote in the letter of credit. It will be provided that a compliant presentation is made under the LC.
This type of financial transaction is mostly done in international transactions, where the buyer and the supplier relationship is rather new and are operating in different countries.
A letter of credit is a very important financial instrument that meet the short term needs which allows its suppliers to obtain the necessary credit for financing his business with hope of generation enough return from it to settle the due amount in the given time period.
The letter of credits need to specify which documents and information are required by the beneficiary upon presentation like the date and place the letter expires. By submitting a complaint presentation the letter of credit provides the beneficiary with a guarantee that they will get paid as long as certain documentary delivery conditions have been met.
The authorized bank will writes a letter of credit on behalf of the buyer must now make sure the conditions for all documentation under the credit are duly met with before paying the supplier.