DLC or SBLC? How payment actually works under UCP 600

In a physical trade the buyer's worst fear is paying for goods that never arrive, and the seller's is shipping goods that never get paid for. The documentary letter of credit exists to shrink both fears at once. It replaces trust between two companies that may never have met with the obligation of a bank that answers to international rules.

A documentary letter of credit, the DLC, is a payment instrument. The issuing bank pays the seller when the seller presents documents that conform to the credit. It is how the deal settles in the normal course. A standby letter of credit, the SBLC, is a guarantee, a backstop. It pays only if something fails, for example if the buyer defaults on an obligation it agreed to. In most of our sugar structures the buyer opens a DLC as the payment mechanism, with an SBLC used where the structure specifically calls for a guarantee. Using the wrong term for the wrong purpose is one of the quickest ways to signal that a counterparty has not done this before.

UCP 600 is the rulebook the International Chamber of Commerce wrote for letters of credit, and banks around the world apply it. Under it the bank does not inspect the sugar. It inspects documents. The credit is transmitted bank to bank, usually by a SWIFT MT700 message, and payment is released against a document set that matches the credit: the Bill of Lading, the commercial invoice, the packing list, the certificate of origin, the certificate of analysis, the phytosanitary certificate, and the insurance certificate where the term is CIF. A discrepancy as small as a misspelled port, or a shipment date one day outside the window, can hold payment until it is corrected. That strictness is not bureaucracy. It is the protection: the money moves on paper that matches, not on a promise.

• The funds stay in the buyer's bank until conforming documents are presented.
• A first-tier issuing bank stands behind the payment, and where needed a confirming bank adds its own undertaking.
• The document set itself proves the cargo was shipped, inspected and insured as contracted.
• If the documents do not conform, the bank does not pay. The risk of non-performance sits with the party that fails.