GlossaryEN1 min readUpdated: Jun 22, 2026
Documentary letter of credit
When a cross-border sale is concluded, both parties face the challenge of payment security – a documentary letter of credit (L/C) addresses it by placing a bank's irrevocable payment commitment between buyer and seller.
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Source: https://iccwbo.org/business-solutions/banking-techniques-and-rules/documentary-credits/
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When a cross-border sale is concluded, both parties face the challenge of payment security – a documentary letter of credit (L/C) addresses it by placing a bank's irrevocable payment commitment between buyer and seller. The importer instructs its issuing bank to pay the exporter a specified sum once a defined set of documents is presented: typically a bill of lading, commercial invoice, insurance policy, and where required an inspection certificate. The bank examines documentary compliance only, not the physical goods, and releases funds solely when all conditions are precisely met. For the exporter, this creates a bank-backed payment undertaking independent of the importer's solvency; the importer pays only against documentary proof of shipment and agreed specifications. Documentary credits are governed internationally by the ICC's Uniform Customs and Practice for Documentary Credits (UCP). They differ fundamentally from documentary collections, where the bank acts merely as a collecting agent without assuming any payment obligation of its own.
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