Lives and Livelihoods

Documentary letter of Credit

The remaining avenue of financing is through commercial or documentary letter of credit. These instruments had their beginning in the earliest days of banking in mediaeval times but their widespread use to cover the international movement of goods has only come into being over the past hundred years. The letter of credit is a more expensive means of financing then the methods already discussed, and its popularity despite this factor is an indication of the extra security that the exporter employing it enjoys. A letter of credit is an instrument issued by a bank in favour of the exporter ( known as the beneficiary) whereby the issuing bank undertakes to pay to the beneficiary a certain amount of money against delivery of specified documents within a stated period of time. In effect, the credit of the issuing bank is substituted for that of the buyer. For people suffering from bad credit, this may not be an option.

Exhibit B Bank documentary collection letter:

The facsimile form Exhibit B above is typical of those used by the Canadian chartered banks for the collection of documentary drafts.  The details in the Exhibit covers the same transaction as in Exhibit A but in this instance John Jones & Co. Ltd. is satisfied with the acceptance of the buyers of their draft without the guarantee of a bank. The documents required will be similar to those called for in a letter of credit transaction.  The draft will only be accepted, however, when the buyers have examined the documents and have found them satisfactory.

The special instructions shown on the form are within the discretion of the exporter. The reverse of the form also contains special standard instructions to the banks foreign correspondent, which read as follows:

“In case of dishonor, please try to obtain the goods, have them landed stored ( in a bonded warehouse) and insure  for ‘whom it may concern notifying us. It is however, understood that you may modify these instructions in order to adapt them to laws and usages prevailing in your country and that you may take such action as you may deem most expedient  to protect or promote our interest in the matter.”