Documentary Credit

Expand your business and ease cash flow

• Increases your business opportunities with a payment undertaking from HSBC
• Improves utilisation of your working capital and cash flow
• Offers an attractive way for your supplier to extend credit to you as they can approach their bankers for post-shipment finance

You already know about the Documentary Credit as payment instrument, but do you realise that it is also a financing tool?

A Documentary Credit (DC) is a written undertaking by a bank (issuing bank), based on your instructions (buyer/applicant), to your supplier (seller/beneficiary) of goods and states the terms, such as time limit and money amount, and documentary requirements the seller needs to fulfill in order to receive payment.

If you are buying from a new supplier or dealing with a supplier in another country, you may be asked to place a deposit or even pay in advance to confirm your order and protect the supplier from non-payment.

However, the supplier may be willing to accept a DC instead of requiring payment for the merchandise upfront or a deposit because the DC issuing bank has given them a guarantee that payment will be made. In this way, you are being financed between the time of placing order and receiving the goods even if no cash has actually changed hands. This improves your cash flow and working capital efficiency.

You can even extend the finance period further if your supplier will accept a usance DC. With a usance DC, you only pay upon maturity of the bills of exchange at a fixed date (mmddyy) or a determinable future date (for e.g. 30 days from the date of bill of lading). With a bank guarantee supporting the usance period, your supplier may be willing to extend even longer credit terms than what you would have received under, say, an open account.