In international trade, the amounts and remoteness of the partners involve the creation by the bank of a specific payment instrument called documentary credit.
Letters of credit are forms of documentary credit. It balances the interests of the seller (the person to be paid) and the buyer (the one who receives the ordered goods in the qualities, quantities and periods contracted). It will provide security of payment sought by the seller and also the security of delivery for the buyer.
Documentary credit is used around the world by many countries with the objective of reducing the conflicts of interest that may exist between sellers and buyers. For instance, the ideal transaction for the exporter is the one when it pays right after receiving the goods. Conversely, for the importer an ideal scenario is when he or she receives payment before shipping the merchandise.
Documentary credit is a commitment from a bank to pay a specified amount to the supplier of goods or services against the submission (within a specified time) of documents that prove that the goods have been shipped or that the benefits or services were performed according to the agreement. The purpose of these documents is to justify the proper execution of the obligations of the exporter. These documents will then be transmitted by the bank to the buyer against reimbursement, for the latter to take possession of the goods.
The benefits of this type of document are for both parts. The seller will receive payment only after the bank has made sure that the merchandise meets the criteria established by the agreement and the buyer will be able to use the products only when it has made the payments.
The use of documentary credit responds to the following two necessities:
To provide the exporter with a commitment from the importer's bank, and separate from the actual payment of the importer (the Bank undertakes to pay, even if the importer has any difficulty in doing so).
Assurance to the importer that the merchandise will be received according to expectations. Documentary credit guarantees that the payment will be done when the seller shows that it has delivered the merchandise.
Letters of credit are forms of documentary credit. It balances the interests of the seller (the person to be paid) and the buyer (the one who receives the ordered goods in the qualities, quantities and periods contracted). It will provide security of payment sought by the seller and also the security of delivery for the buyer.
Documentary credit is used around the world by many countries with the objective of reducing the conflicts of interest that may exist between sellers and buyers. For instance, the ideal transaction for the exporter is the one when it pays right after receiving the goods. Conversely, for the importer an ideal scenario is when he or she receives payment before shipping the merchandise.
Documentary credit is a commitment from a bank to pay a specified amount to the supplier of goods or services against the submission (within a specified time) of documents that prove that the goods have been shipped or that the benefits or services were performed according to the agreement. The purpose of these documents is to justify the proper execution of the obligations of the exporter. These documents will then be transmitted by the bank to the buyer against reimbursement, for the latter to take possession of the goods.
The benefits of this type of document are for both parts. The seller will receive payment only after the bank has made sure that the merchandise meets the criteria established by the agreement and the buyer will be able to use the products only when it has made the payments.
The use of documentary credit responds to the following two necessities:
To provide the exporter with a commitment from the importer's bank, and separate from the actual payment of the importer (the Bank undertakes to pay, even if the importer has any difficulty in doing so).
Assurance to the importer that the merchandise will be received according to expectations. Documentary credit guarantees that the payment will be done when the seller shows that it has delivered the merchandise.
About the Author:
Wade Henderson - recognized Professional - 15 yrs in the Business Finance Field - strong reputation for getting the deal done. IMMFinancial.com
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