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1. What is a Documentary Letter of Credit (DLC)?

A Documentary Letter of Credit is issued by a bank, guaranteeing payment to the supplier on condition that the correct documents (specified in the terms and conditions outlined on issue) are presented.

The University currently utilises a line of credit of $500,000 with the Bank of America to accommodate equipment purchases requiring a DLC.

All parties in a documentary credit transaction deal with documents, not with goods. The Bank of America, on behalf of the University, specifies the documents to be presented by the supplier. Provided all documents are presented and, conform at face value to the credit requirements, they will be accepted.

2. What does a DLC offer ?

The DLC contains the terms of the contract agreed between the parties. This is to ensure that the requirements specified in the purchase order are met prior to the bank releasing payment to the supplier. This may include delivery time, quality, payment terms, independent third party testing of goods etc.

An accepted DLC commits the providing bank to meet the payment in place of the buyer and then to recover payment from the buyer.

The banks' role is to act as collection agents, dealing exclusively in documents rather than goods. They ensure that the customer's instructions are executed and that the "documents" listed, eg bill of lading, are presented to the bank by the supplier in exchange for payment.

A DLC usually places the buyer, as a result of the surety of payment, in a position of greater bargaining power in their trade negotiations when compared to using alternative means of payment.

A buyer benefits from using a DLC by retaining the use of the funds until a date closer to delivery.

The buyer has the right to refuse acceptance of the goods if the terms of the contract have not been fulfilled, provided that these terms are specified in the DLC.

If goods are rejected by the buyer, the supplier is allowed to find another buyer or pay for the return of the goods.

2.1 When should I use a DLC ?

• where the supplier seeks a guarantee of payment before starting work on contract often because the supplier has not previously dealt with the University or
• where the supplier's bank seeks a guarantee of payment before funding work on a contract.

3. How do I apply for a DLC ?

3.1 Completing a DLC application form

An official 'Application for Irrevocable Documentary Credit' is to be completed by the relevant Budget Unit. The completed application form together with the purchase order and any associated documentation (eg copies of correspondence with the supplier) is then forwarded to the Senior Accountant.

When completing the application, please ensure that all terms and conditions are clearly specified and that they reflect the details agreed in the purchase order. In particular, care must be taken with specifying the payment terms and acceptance conditions to ensure that the obligations of all parties are clear. Any amendment to an approved DLC will incur additional bank charges, regardless of how minor it is.

3.2 What happens to a DLC after completion by the Budget Unit ?

• Director, Finance and Business Services
• Senior Accountant, Finance and Business Services
• Manager, Business Education
• Accountant Fees Accounting

On acceptance of the DLC, the bank will fax to Finance and Business Services the newly created Documentary Letter of Credit containing the unique reference number (DLC number) which must be used on all related future correspondence. The bank will also forward a copy to the supplier's bank for them to confirm acceptance of the DLC and retain for their records. The original will also be sent by certified mail to Finance and Business Services.

Finance and Business Services will then forward a copy of the DLC to the relevant Budget Unit and file the original in the official file (4.4.7.155D).

4. What happens when the goods are ready for the University ?

The University may also be required to forward documents to the bank such as quality acceptance certificates etc.

The bank will make payment to the supplier upon presentation and assessment of the specified documents to ensure that they conform to the terms and conditions of the DLC.

Payment of monies by the ANU under the DLC occurs at the following points:

• establishment fee at time of acceptance of the DLC by the bank;
• amendment fee on acceptance of the amendment (if any) by the bank;
• payment of the contract amount or part payment on presentation of the specified documents to the bank together with the completion fee.

5. Amending a DLC

The bank charges additional fees for any amendment to an approved DLC, regardless of how minor it is. Amendments may range from altering a letter in a name, to changing the delivery date or amount payable. This emphasises the importance of recording all purchase order details correctly on the initial application.
 

6. Insurance, Fees & Charges

If insurance is paid by the supplier, it can be requested that the insurance policies be presented with the other required documents before payment to the supplier is made (cross box labelled 'Insurance Policy or certificate covering marine & war risks' at item 46A on the application). If insurance is paid by the University, this can form part of the DLC or be paid separately.

Fees associated with a DLC include establishment, amendment and payment fees. A current schedule of fees is provided here. These costs are borne by the University as part of the credit facility.

Other fees and charges not specifically associated with a DLC are incurred during the course of negotiations. Item 71B allows the University to indicate who will bear any additional costs. It is recommended that all those costs incurred outside Australia including acceptance commissions and discount charges if any, are met by the supplier, though negotiations at the outset must establish who will incur such costs.
 

7. Arbitration in the event of disputes