are documentary credits?
Also known as "letters of credit",
documentary credits are amongst the safest methods of
payment in exporting (other than payment in advance).
Your customer arranges a letter of credit with its bank
(known as the
"issuing bank"). In this letter of credit will
stand all the instructions that you must follow and documentary
evidence that you must supply to a correspondent bank
(which will normally be specified in the letter of credit)
in South Africa (known as the "advising bank").
The correspondent bank may be a different bank to your
own bank (it is in fact the local representative of the
overseas issuing bank) As the exporter, you will receive
a copy of the letter of credit, as will the South African
The need for accurate documentary proof
Once you have dispatched the goods and attended
to all of the requirements as stated in the letter of
credit, you can approach the advising bank and submit
to them all of the documentary evidence (such as the shipping
documents, phytosanitary documents, inspection certificates,
etc.) of what you have done and as is set out in the letter
of credit. If your documentary evidence exactly meets
the requirements as specified in the letter of credit,
the advising bank will pay you as per the payment instructions
(which may be immediately, or after a certain period of
time or on a specific date). It is important, however,
that the documentary evidence that you supply to the advising
bank meets the requirements as stipulated in the letter
of credit, exactly - even a spelling mistake or a missing
comma can result in their refusal to pay.
Irrevocable and confirmed letters of
Letters of credit can also be both "irrevocable"
and/or "confirmed" An accurate and authentic
"irrevocable" letter of credit, verified by
your own bank (not necessarily the advising bank), carries
little credit risk. As long as your documentary evidence
is accurate and in keeping with the requirements of the
letter of credit, the issuing bank guarantees to pay you
within the stipulated time. By "confirming" the
letter of credit, your bank agrees to pay you even if
the issuing bank (i.e. the importer's bank) defaults.
Your bank will charge a commission based on how creditworthy
the issuing bank is. Of course, letters of credit can
also be unconfirmed and/or revocable, but these options
are much more risky for you as the exporter because it
allows the importer (or his/her issuing bank) to renege
on the payment.
Term credits and financing
A letter of credit can specify any credit
period that you have negotiated with your customer. A
letter of credit that that incorporates a payment after
a given term (e.g. 60 days) is known as a term credit.
A term credit will require you to finance the gap between
delivery and payment.
You can use a valid, current letter
of credit to raise additional finance in a similar way
to using a bill of exchange. Your customer is responsible
for the cost of issuing the letter of credit. The customer
may want to pass these costs on to you as part of the
price negotiation. Documentary credits are typically
used for exports to customers you have not sold to before
and for customers and countries that present particular