Silta alhaalta kuvattuna

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

Export documentary credit is a payment method where buyer's bank undertakes to pay the seller provided that the terms of the documentary credit are met. 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.

As documentary credits are irrevocable, you can be certain of payment in advance and plan your company's production well ahead.

By using a confirmed documentary credit you can also do business in riskier countries.

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.  

You will be notified immediately after the documentary credit has arrived at the bank. Read the details of the documentary credit carefully and ask for revisions, if needed.

Present the documents required in the documentary credit to the bank, 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.  The fulfilment of the terms is verified from the documents required in the documentary credit. According to the regulations of the International Chamber of Commerce (ICC), the buyer (customer) is ultimately liable for the costs of the documentary credit. It is sensible to agree on the distribution of costs already in the sales contract.

The ICC has drawn up Uniform Customs and Practice for Documentary Credits, which the banks in different countries comply with.

By using a confirmed documentary credit you can also do business in riskier countries. In addition to buyer risk, it protects the seller against the financial and political risks associated with the trading partner's country and bank.

A confirmed documentary credit constitutes the buyer's bank's (issuing bank) as well as the confirming bank's undertaking to remit payment to the seller against the presentation of the documents complying with terms of the documentary credit. The seller should check beforehand whether the documentary credit can be confirmed as the notifying bank is not obligated to confirm the documentary credit.

The price of the confirmation is determined case by case depending on the issuing bank's country and bank risk, and it is also affected by the amount and validity of the documentary credit.

A documentary credit can also be confirmed silently. It means that the advising bank undertakes to pay the seller against the presentation of the documents complying with the terms of the documentary credit. Foreign parties are not notified of such confirmation.

Discounting

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

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 cash payment is remitted to the seller after the documents have been presented.

This way the foreign buyer is given the payment time it needs and hence the transaction does not involve interest rate and currency risk for 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.

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.

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.