The Buyer (Importer/Applicant)

Since a documentary credit is a pledge by the bank to make payment to the seller, the bank will want to evaluate the creditworthiness of the buyer. If the buyer's credit and relationship with the bank is excellent, the bank will issue a credit for the full value. If the buyer's relationship is good, but perhaps not excellent, the bank will require that the buyer pledge a percentage of the value of the documentary credit in cash funds. If the buyer's relationship with the bank is less established, the bank will require that they buyer pledge 100 percent of the value of the documentary credit in cash funds in advance.

It is essential that the application for the documentary credit be in conformity with the underlying sales contract between the buyer and the seller. The buyer's instructions to the issuing bank must be clear with respect to the type of credit, the amount, duration, required documents, shipping date, expiration date, and beneficiary.

The Issuing (Buyer's) Bank

Upon receiving the buyer's application, the opening bank checks the credit of the applicant, determines whether cash security is necessary, and scrutinizes the contents of the application to see whether they generally are consistent with national and international banking and legal requirements.

If the application is satisfactory to the bank, the buyer and the opening bank will sign an agreement to open a documentary credit. The credit must be written and signed by an authorized person of the issuing bank.

The issuing bank usually sends the original documentary credit to the seller (called the beneficiary) through an advising bank, which may be a branch or correspondent bank of the issuing (opening) bank. The seller may request that a particular bank be the advising bank, or the buyer's bank may select one of its correspondent banks in the seller's country.

The Advising (Seller's) Bank

Upon receipt of the credit from the issuing bank, the advising bank informs the seller that the credit has been issued.

The advising bank will examine the credit upon receipt. The advising bank, however, examines the terms of the credit itself; it does not determine whether the terms of the credit are consistent with those of the contract between the buyer and seller, or whether the description of goods is correctly stated in accordance with the contract. The advising bank then forwards the credit to the seller.

If the advising bank is simply "advising the credit," it is under no obligation or commitment to make payment, and it will so advise the seller. In some cases the advising bank confirms (adds its guarantee to pay) the seller. In this case it becomes the confirming bank.

If the advising bank confirms the credit it must pay without recourse to the seller when the documents are presented, provided they are in order and the credit requirements are met.

The Seller/Exporter/Beneficiary

In addition to assessing the reputation of the buyer prior to signing a sales contract, the seller should also assess the reputation of the buyer's (issuing) bank before agreeing to rely upon that bank for payment in a documentary credit. It is not unknown for sellers to receive fictitious documentary credits from non-existent banks and to realize their mistake after shipment.

The seller must carefully review all conditions the buyer has stipulated in the documentary credit. If the seller cannot comply with one or more of the provisions, or if the terms of the credit are not in accordance with those of the contract, the buyer should be notified immediately and asked to make an amendment to the credit.

The seller should also scrutinize the credit to make certain that it does not contain provisions that specify documents such as acceptance reports, progress reports, etc. that have to be signed or approved by the buyer. By refusing to sign such documents, the buyer can block payment.

After reaching agreement, the seller is well-advised to provide the buyer with a sample of the final product specified in the credit for confirmation of quality, suitability, etc.

Complying With the Documentary Credit

Seller/Exporter/Beneficiary

Upon receipt of the documentary credit, the seller should immediately and carefully examine it to ensure it conforms with the original sales contract with the buyer and that all the conditions stated in the credit can be met. If any of its conditions have to be amended, which can be time-consuming, the seller should immediately contact the buyer.

Examining the Documentary Credit

The following is a checklist for the seller's examination of the credit: