This is a guarantee from the issuer (i.e. issuing bank) to the beneficiary that the issuer will pay the beneficiary funds when the beneficiary provides certain documents to the issuer in a certain manner time and place. A documentary letter of credit is issued by a bank or a financial institution. The letter of credit assures the supplier (beneficiary) that they will receive payment up to the amount  stated in the letter of credit, provided that the beneficiary makes a compliant document presentation.

 

When an applicant takes advantage of a documentary letter of credit, they free up capital that would otherwise be tied up with the beneficiary the form of a security deposit. Due to this ability to boost an applicant's cash flow, documentary letters of credits are a very important aspect of international trade for deals of all sizes.