Definition
A documentary credit is a bank-backed trade finance instrument where payment is made against a compliant document presentation. In everyday usage, documentary credit usually refers to a documentary letter of credit (LC).
What makes it different from normal payment terms
The key difference is the control mechanism:
- Open account / advance payments: payment is handled directly between buyer and seller.
- Documentary credit: the bank’s undertaking is conditional on presenting documents that match the credit text.
This is why teams talk about “strict compliance” — a small document mismatch can delay or block payment.
The practical workflow
- Buyer applies for issuance (issuing bank).
- Seller receives an advised LC text (advising bank).
- Seller ships and gathers documents.
- Seller presents documents within timelines.
- Banks examine documents and proceed with payment/acceptance if compliant.