Documentary Credit

A Letter of Credit (LC), also known as a Documentary Credit (DC), is an undertaking by a buyer’s bank to pay its suppliers for goods or services, subject to agreed conditions.

Letters of Credit are used extensively in financing of international trade because they offer assurance that both the parties will fulfil their obligations in the trade.

The Letter of Credit (LC) process starts with the buyer and seller in a trade agreeing upon the initial contract. The buyer then request their bank to issue an LC.

The buyer’s bank issues the LC to the seller’s bank. Payment is only made once the goods have been shipped, and shipping documents presented by the seller such as invoices and proof of transport.

Provided the relevant conditions agreed upon by all parties have been met, the buyer’s bank makes payment to the seller’s bank.

Compared to traditional methods, such as cash payments or wire transfers, Letters of Credit (LCs) provide increased protection against the risks associated with cross-border transactions.

They also ensure timely payment and facilitate easier access to working capital finance.

For buyers, LCs can help secure international purchases and negotiate better contract terms.

For suppliers, LCs minimise export payment risk and provide easier access to financing without the need for a credit facility.

Letters of Credit (LCs) can have different features and here are some of the common terminologies associated with Letters of Credit:

Irrevocable Letters of Credit – An Irrevocable LC cannot be cancelled or have their conditions changed unless every party involved agrees.

Sight Letters of Credit – A Sight LC means that as soon as the LC conditions are met, the buyer’s bank will have the obligation to pay within a reasonable period.

Usance Letters of Credit – An Usance LC means that supplier credit is embedded in the LC, called usance tenor, and that payment will be made at the end of the usance period after the relevant conditions are met.

Back-to-Back Letters of Credit – a Back-to-Back LC involves the issuance of two LCs, one where the beneficiary of the LC is an intermediary and another one issued, at the request of the intermediary to the seller.

This type of LC helps the intermediary leverage the LC issued in their favour to request the issuance of another LC and provides trade confidentiality.

Transferable Letters of Credit – A Transferable LC allow an intermediary to transfer their rights and obligations under the LC to the supplier.

This type of LC can be useful when the intermediary agent is unable to supply some or all of the goods stipulated in the LC and therefore wishes to transfer part, or all, of the credit.

A bank guarantee or a standby letter of credit acts like a safety net for business transactions. It promises a specific payment to the beneficiary (seller or buyer) if the other party breaks the contractual obligations to ensure minimal impact on working capital.

While both Bank Guarantees and Letters of Credit are trade finance solutions that serve to mitigate risk while importing and exporting, an LC is a payment and risk mitigation tool, while the Guarantee is triggered in the event of “default”.

For Bank Guarantees, the bank only pays if the buyer doesn't, so the bank’s responsibility is determined by the buyer’s decision or ability to pay.

Payment under a compliant Letter of Credit is expected, and the bank takes on the obligation to pay the seller.

The issuance, amendment and acceptance of HSBC Letters of Credit can be requested for via many of HSBC’s digital channels, and the most common are HSBCnet desktop and mobile and at our local Trade Counters.

Our comprehensive suite of digital solutions that will help simplify applications and provide real-time visibility on your transactions.

With HSBCnet, your global and regional treasury and finance teams can have access to view your subsidiaries’ transactions and insights

HSBCnet dashboards are customisable with widgets, trackers, notifications and alerts when action is due.

We have APIs for Import and Export Letter of Credit that helps you connect directly with us. Contact us.

The Letter of Credit is a contract between yourself and your supplier. Here are a few documents that are often called for in a Letter of Credit:

1. Signed Commercial Invoice
2. Packing List
3. Bills of Lading or Combined Transport Document
4. Original Air Waybill
5. Cargo Receipt
6. Marine or Air Insurance Policy
7. Beneficiary’s Certificate

Confirming a Letter of Credit can vary from country to country. Our dedicated relationship managers and trade sales managers are here to connect you to HSBC markets to support your growth. Please contact us to discuss your needs.

HSBC has presence in 50 markets and can issue and advise Letters of Credit in many trade corridors.

Our in-house trade experts handle more than 250,000 LCs a year and our standards for document checking are consistent across HSBC offices worldwide.

Keep the terms of the Letter of Credit simple, wording clear, and limit the required documents to the key ones.

HSBC invests in automation and client servicing support to process your transactions with quality and promptly and our client servicing teams in every HSBC office are committed to seamless experience to support your needs.