- First of all, what is the different between a letter of credit and documentary credit?

- None, it’s the same thing. It’s just that documentary credit is generally accepted as being the correct term, although letter of credit is a very common term in Shipping..

- So how would you documentary credit?

- Well, it’s really an arrangement where a bank, operating on the instructions of an importer, another bank to pay a of money to an exporter on production of specified documents.

- Could you explain how a documentary credit works?

- Yes, to begin with there has to be a sales contract between a , or producer, and an importer, and the sales contract must include an arrangement for through a documentary credit.

The next step is for the company which is importing to tell its bank to provide a . This means that a documentary credit is provided in the exporter’s favour.

The bank that issues the documentary credit is called the issuing bank.

Then, the issuing bank asks another bank (usually the exporter’s bank) in the exporter’s country to the credit line by telling, or we say , the exporter that the credit has been arranged. The bank that does this is known as the advising bank because it advises when the credit line is ready.

The next step is for the advising bank to send the to the exporter. When this has been done, the exporter can send the goods to the importer.

In the next stage, the exporter gives (we say ) the documents to a bank… er…usually the advising bank. The bank checks the documents to make sure that everything is okay, and then the bank pays the exporter.

Then the documents are sent to the issuing bank in the importer’s country. The issuing bank checks them again and pays the same amount of money to the advising bank.

- So this is where the company that is importing pays the issuing bank?

- That’s right. It’s usually paid by a simple .

- And is that the final stage of the documentary credit?

- No, not quite. Finally, the issuing bank the documents to the importer. The importer needs these documents in order to receive of the goods.

- I see. Hmm. It’s not a simple process, is it?

- No, it isn’t. But it’s accepted internationally and, most of the time, it works!