How to Use a Documentary LC to Secure Commodity Purchases
How to Use a Documentary LC to Secure Commodity Purchases
A clean, bank issued Documentary Letter of Credit gives sellers payment certainty and lets buyers control shipment through precise documents. If you set the structure, timelines, and MT700 terms correctly, you reduce disputes, cut delays, and keep cash flow predictable. This guide shows exactly how to deploy a DLC for real commodity trades without games or vague promises.
When a DLC fits a commodity deal
- Counterparty risk is material and prepayment is off the table.
- Seller wants bank risk, not buyer risk.
- Shipment is cross border with unfamiliar ports, carriers, or inspection agents.
- You need control over shipment release via original bills of lading or telex release rules.
- Local FX controls or country risk make confirmation prudent.
Core structures to consider
Incoterms and document control
MT700 drafting checklist
Get these fields right and you avoid most discrepancies. Keep language simple and test against real carrier and inspection practice.
Commodity specific document sets
Timeline and fees that actually show up
- Draft and approval: 3 to 7 business days once the bank has a complete file.
- Issuance to shipment: based on contract window, build in a buffer.
- Presentation to payment: sight 2 to 5 business days if confirmed and compliant, usance per tenor.
- Typical cost bands: issuance and advising 0.5 to 1.5 percent per year equivalent, confirmation based on country and bank risk, document checking a fixed per presentation fee, UPAS discount at a spread over a benchmark rate.
Common errors that kill payment
- Document requirements that cannot be produced in the real world, for example carrier wording that lines never issue.
- Mismatched dates, shipment window outside 44C, or stale documents beyond the presentation period.
- Name or address variations between contract, invoice, and LC that fail strict compliance.
- Inspection firm not named or not accepted by the buyer or the bank.
- Charges not allocated in 71B, which creates pushback at confirmation or reimbursement.
What banks expect to see in the application
- Audited or management accounts, recent bank statements
- Signed sales contract with Incoterms and shipment plan
- Credit line capacity or collateral plan for issuance
- Sanctions, AML, and KYC documentation
- Nominated bank for advising and, if required, confirmation
- Accepted inspection firms and methods
- Partial shipments, transshipment policy, tolerance on quantity and value
- Presentation period and document list in plain language
Red flags to avoid
- Requests to issue a DLC without a real contract or shipment plan.
- Unfunded buyers asking for confirmed DLC without bankable financials.
- Document sets that rely on third parties who will not cooperate.
- Jurisdictions with active sanctions risk or blocked banks.
Request DLC issuance or confirmation terms
Send your sales contract, shipment plan, and preferred document set. We will confirm eligibility and return a draft MT700 and pricing.
Start the ProcessThis guide is informational. Any letter of credit arrangement is subject to KYC and AML checks, credit approval, and executed agreements. Rules apply under UCP 600. UPAS, reimbursement, and discounting terms depend on banks and jurisdictions. Financely is an independent advisor, not a bank, and does not guarantee issuance without underwriting and bank approval.
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