A Documentary Letter of Credit is a written obligation on the part of the bank to pay a specific amount subject to meeting of the conditions of the letter of credit stipulated by the buyer. With a DLC, the bank assumes an irrevocable obligation towards the seller on the basis of request by the buyer.
There are multiple types of Lines of Credit. Unlike a Standby Letter of Credit and other Bank Instruments, which is never truly intended to be used, a Documentary Letter of Credit is the actual payment mechanism. With a DLC the money will be dispersed whereas with an SBLC if the money is being dispersed something has gone terribly wrong.
Various types of letters of credit include import, export for purchasers and suppliers, notified, confirmed transferable, revolving, ans the earlier mentioned standby letter of credit among others. a DLC is one of the most important and most used payment instruments used in international and domestic trade.
A DLC supplies certainty for the buyer that payment of a specific amount will not be made until the seller meets the conditions set by the buyer while still providing certainty for the seller that he or she will be paid for the goods after the conditions of the letter of credit are met.
For the party ordering the letter of credit, most commonly the buyer, a DLC provides certainty that the goods were dispatched prior to payment. The possibility of limiting commercial risk to a minimum by setting conditions for the letter of credit is another reason the vendors like to use a Documentary Letter of Credit.
It provides the possibility of gaining more favorable pricing as well due to provisions in regards to high quality payment security provided to the business partner.
In addition to these clear benefits, it also gives motivation for the seller to arrange the delivery at the agreed time and in line with the pre outlined conditions set forth in the documentary letter of credit. There is clear protection for the for the recipient of the letter of credit, commonly the seller, as well. The guarantee of payment for the delivery of goods (or services technically) once the conditions of the letter of credit are met is a necessity in export and import trade. A DLC also offers certainty that the pre-agreed payment is bound to meeting of mutually agreed upon conditions.