There are four main parties to a basic documentary letter of credit transaction. Note that each party has multiple names. The name used for each party to the transaction depends upon who is speaking. Businesspeople like to use the names buyer, seller, buyer's bank and seller's bank. The banks prefer to use the names applicant, beneficiary, issuing bank, and advising bank. The four parties are:

The Buyer (Applicant/Importer)

The buyer initiates the documentary credit process by applying to his bank to open a documentary credit naming the seller as the beneficiary. The buyer, therefore, may be called the buyer in commercial terms, the importer in economic terms, and the applicant in banking terms. They are all one and the same.

The Issuing (Buyer's) Bank

Upon instructions from the buyer, the issuing bank (typically the buyer's regular business bank) issues a documentary credit naming the seller as the beneficiary and sends it to the advising bank (typically the seller's bank).

The Advising (Seller's) Bank

Upon instructions from the issuing bank and the buyer, the advising bank (typically the seller's bank) advises the seller of the credit. The advising bank is typically the seller's regular business bank and is in the seller's country.

The Seller (Beneficiary/Exporter)

The seller receives notification (advice) of the credit from the advising bank, complies with the terms and conditions of the credit, and gets paid. The seller is the beneficiary of the documentary credit. The seller, therefore, may be called the seller in commercial terms, the exporter in economic terms, and the beneficiary in banking terms. They are all one and the same.

Basic Documentary Credit Procedure

The documentary credit procedure involves the step-by-step exchange of documents giving title to the goods for either cash or a contracted promise to pay at a later time. There are four basic groupings of steps in the procedure.

Click on one of the four choices below to display the group and its steps:

ISSUANCE

Issuance describes the process of the buyer's applying for and opening a documentary credit at the issuing bank and the issuing bank's formal notification of the seller through the advising bank.

AMENDMENT

Amendment describes the process whereby the terms and conditions of a documentary credit may be modified after the credit has been issued.

UTILIZATION

Utilization describes the procedure for the seller's shipping of the goods, the transfer of documents from the seller to the buyer through the banks, and the transfer of the payment from the buyer to the seller through the banks (settlement).

SETTLEMENT

Settlement (a subpart of utilization) describes the different ways in which payment may be effected to the seller from the buyer through the banks.

Note: Issues relating to applying for a documentary credit, confirmed vs. unconfirmed credits, special types of credits, settlement, correspondent and confirming banks are discussed below.