Documentary credit is an instrument that allows businesses to be engaged in successful trade export relations. These documents allow international trade to overcome the challenges given by the distance involve in such relations.
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.
The difficulty lies in the diametrically opposed positions of buyer and seller. The ideal situation is for the first "I receive the goods, I pay", while the second was "You pay, I send the goods." Documentary credit is a technique known worldwide, existing for a long time that can meet these two requirements.
Documentary credit establishes that a financial institution will give payment to the exporter of the goods or services when he or she submits the documents that show that the merchandise was delivered. The delivery of the goods has to meet the criteria of the agreement. The exporter will send the documents to a bank previously agreed upon. The bank will then proceed to the payment of the exporter and grant possession to the importer.
Thus, the buyer does not transmit any funds to the seller until it has received documentary credit to take possession of the goods and the seller receives payment once it has shipped, provided that the requirements have been met.
Therefore, documentary credit springs from the following needs posed by international trade:
One: the need for the exporter to have a written commitment of importer to pay for the merchandise. Using documentary credit, the seller will get paid by the bank if the buyer is unable to.
Two: the need for the importer to make sure that the products it receives are what was expected and signed for. The seller will be paid only after demonstrating it has honored the commitment.
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.
The difficulty lies in the diametrically opposed positions of buyer and seller. The ideal situation is for the first "I receive the goods, I pay", while the second was "You pay, I send the goods." Documentary credit is a technique known worldwide, existing for a long time that can meet these two requirements.
Documentary credit establishes that a financial institution will give payment to the exporter of the goods or services when he or she submits the documents that show that the merchandise was delivered. The delivery of the goods has to meet the criteria of the agreement. The exporter will send the documents to a bank previously agreed upon. The bank will then proceed to the payment of the exporter and grant possession to the importer.
Thus, the buyer does not transmit any funds to the seller until it has received documentary credit to take possession of the goods and the seller receives payment once it has shipped, provided that the requirements have been met.
Therefore, documentary credit springs from the following needs posed by international trade:
One: the need for the exporter to have a written commitment of importer to pay for the merchandise. Using documentary credit, the seller will get paid by the bank if the buyer is unable to.
Two: the need for the importer to make sure that the products it receives are what was expected and signed for. The seller will be paid only after demonstrating it has honored the commitment.
About the Author:
Wade Henderson - recognized Professional - 15 yrs in the Business Finance Field - strong reputation for getting the deal done. IMMFinancial.com Letter Draft LC Advance Get a totally unique version of this article from our article submission service
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