Documentary credits or, as they are often referred to as Letters of Credit (or L/C), are commonly used in international trade when the parties are not familiar with each other and prefer to commence their business relationship cautiously: the exporter may be reluctant to send goods to the importer without being sure that payment will be made, conversely the importer may not want to pay for the goods unless they are sure that goods will be shipped.
In that respect, using documentary credits as a payment mechanism substitutes the credit of the importer with that of their bank, ensuring that the exporter receives payment as soon as the goods have been shipped and, if required, granting short-term financing to the importer.
The International Chamber of Commerce (ICC) in Paris has formulated the Uniform Customs and Practice (UCP) for Documentary Credits. This set of rules is acknowledged and utilized worldwide and outlines the payment obligations that banks enter into when supporting their clients with documentary credits. The banks must observe the terms of the documentary credit only, regardless of any other ancillary contracts, and are responsible solely for handling the underlying documents of a transaction, bearing no responsibility for the goods or the project to which the documents are related. Hence, the results that we at MPG aim to achieve for our clients are twofold: lessening the cost of capital and mitigating their financial risk.
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