A documentary letter of credit (DLC) is a guarantee of from the issuer (i.e. issuing bank) to the beneficiary that the issuer will pay the beneficiary money when the beneficiary provides certain documents to the issuer in a certain manner time and place.
A documentary letter of credit is issued by a bank or a financial institution. The letter of credit assures the supplier (beneficiary) that they will receive payment up to the amount stated in the letter of credit, provided that the beneficiary makes a compliant document presentation.
Once the beneficiary makes a compliant presentation, the Issuing institution will make a payment. Even if the buyer (applicant) cannot pay for the beneficiary’s services, the issuer is obliged to honor the presentation.
Documentary letters of credit are mostly used in international transactions, where the buyer and seller have yet to establish a strong relationship and/or operate in different countries. When concluding a deal with a buyer from a different country, the seller is exposed to risks due to the physical distance between the two parties, foreign or unknown legal systems, and lack of knowledge about the buyer. A seller may be hesitant to enter such a risk-sensitive deal without a letter of credit as financial security.
In these cases the credit worthiness of the issuer stands in place of the credit worthiness of the buyer – giving the supplier greater comfort that he will be paid.
It is a guarantee of payment issued by a bank/FI on behalf of a client that is used as payment in case of default by the applicant.
Standby Letters of Credit are issued for use in a wide variety of commercial and financial operations. Standby letters of credit are very much alike documentary letters of credit, their main difference is that unlike DLC’s, they only become operative in case the applicant defaults, then the beneficiary in whose favor the SBLC was issued, can draw on the SBLC and demand payment.
Historically, Standby letters of credit were developed because the US regulator legally limited US bank’s authority to issue guarantees.
SBLC’s are very similar to demand guarantees, which also require that the presentation of stipulated documents be compliant with the terms and conditions of the guarantee. SBLC’s and guarantees are different in terms of protection, they both serve the primary purpose of making sure that sellers get paid, but while a standby letter of credit protects the seller, a bank guarantee protects both sides, since it also protects the buyer in case the supplier never ships the goods or ships them in a damaged condition.
Standby letters of credit are a very flexible tool, making them a suitable product for securing a wide range of payment scenarios.
A Guarantee is a promise of payment from the Guarantor to the Beneficiary that the Guarantor will pay the beneficiary when the beneficiary submits certain documents or makes a specific demand to the Guarantor in a certain manner time or place.
Guarantees provide comfort to the beneficiary; in case the applicant fails to meet his obligations (either financially or by performance) as per the contract made between the applicant and the beneficiary, the beneficiary will have the guarantee to turn to for payment..
Having a guarantee issued in support of a client’s transaction can help the client grow and expand their business by postponing current payments for goods and/or services to a later date, provide comfort to buyers, allow clients to bid on transaction , without requiring that NVC’s clients tie up their available cash.
What is a Ready Willing and Able?
It is a document is issued by banks or financial institutions on behalf of clients, demonstrating intent and capability (both financially and legally) to enter into a financial transaction. RWA’s are often also referred to as bank comfort letters.
How does it work?
We provide ready willing and able (RWA) letters for our clients, usually via MT799 message.