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It is a conditional guarantee of payment issued by the buyer’s bank at the request and risk of the buyer.
This is when a seller entrusts shipping documents to their bank to send to the buyer’s bank. The buyer’s bank only releases the documents to the buyer when they pay for the goods or make a promise to pay on a future date.
A documentary credit stipulates the documents that are to be presented and the content of these documents. We then verify that these conditions are met before making payment to the supplier. If the documents presented by the supplier do not comply with the terms and conditions of the documentary credit, we refer the discrepancies or irregularities to the buyer. The buyer can either accept the documents as presented and make payment, or refuse to accept the documents, in which case payment is not made.
Documentary credits are irrevocable, that is, they cannot be amended without approval from all parties. A supplier may not be comfortable manufacturing goods to meet a specific order if the documentary credit representing payment for that order could be amended or cancelled without their knowledge or acceptance. Once a documentary credit is issued, it cannot be assumed that amendments can or will be accepted by the supplier.
The International Chamber of Commerce (ICC) has written rules for the operation of documentary credits and documentary collections. A copy of the rules may be obtained from ICC Australia, Sydney (02) 9921 4259 or Melbourne (03) 8608 2261. More details about the ICC may be found at www.iccwbo.org.
A bill of exchange is a demand for payment issued by the seller to the buyer. It is a legal document governed within Australia by the Bills of Exchange Act 1909. International conventions also support the basic rights and obligations of the various parties to the bill. A valid bill of exchange facilitates payment of trade transactions and provides a more straightforward way of debt recovery in the event of default than relying on the underlying commercial contract. A bill of exchange is not a guarantee of payment. However, it does allow for legal recourse against the acceptor in the event that payment is not made.
As the advice on this website has been prepared without considering your objectives, financial situation or needs, you should, before acting on the advice, consider its appropriateness to your circumstances. View our Financial Services Guide (PDF 56kb)