Differentiate a documentary LC from a documentary collection.

• A. Documentary LC provides payment guarantee from the issuing bank
• B. Documentary collection guarantees payment
• C. They are the same
• D. Neither involves banks

Answer: (A)

The key distinction is the bank’s payment commitment. In a documentary letter of credit, the issuing bank provides an irrevocable promise to pay the seller the agreed amount, as long as the seller presents the required, compliant documents. This creates a real payment guarantee for the seller, shifting the payment risk to the bank (and the buyer’s bank) if terms are met.

In a documentary collection, the bank simply acts as an intermediary to move documents and arrange payment or acceptance by the buyer. There is no bank guarantee of payment—payment is still contingent on the buyer’s willingness to pay or accept at the time of collection, so the seller retains more credit risk.

Thus, a documentary LC is characterized by a payment guarantee from the issuing bank, while a documentary collection is not. The two are not the same, and both involve banks in the process, contrary to the option that suggests otherwise.