Documentary credit can be paid in three different forms:
Documentary credit can be paid by cash either by the issuing bank or by the correspondent bank. It may also be paid through the acceptance of an effect by a correspondent bank or the issuing bank. The third form is through deferred payment without support for differences in exchange rates.
Once the credit is submitted and accepted, the exporter will submit all documentation that proves that the delivery was done according to the documentary credit. This bank will forward this information to the buyer. The bank will proceed to the payment of the merchandise if the transaction and the shipment were done according to what the documentary credit dictates.
It is important to know the risks that exporters and importers incur when using documentary credit.
Documentary credit is not free of risks for the parties to the contract. There are still two types of risks: the documentary risks and the risks of non-payment.
The first risk has to do with decryption. Documentary risks are related to discrepancies that may exist between what actually arrive at the port or airport and what the letter of credit indicates. The importer risks receiving products of a quality different from what was expected. Fraudulent transactions and errors in the decryption of the documents may also be mentioned as possible risks.
Banks are responsible of the verification process of the shipment documents. Any error in the documentation must be detected by the bank and corrected with the exporter. The issuing bank will verify that the shipment and the products received are in the conditions agreed on the documentary credit.
The second risk has to do with non-payment.
The bank is also taking risks because if the buyer fails to deposit the money that will be given to the seller, it is the bank that must comply with the contract. The banks also have the risks of failure in transferring the money from one country to the other when the importer reports insolvency.
The banker of the importer might in any event not to be reimbursed by the client unless it took the precaution of blocking the funds. Added to this risk is also the possibility of foreign exchange risk if a hedging was not planned.
Documentary credit can be paid by cash either by the issuing bank or by the correspondent bank. It may also be paid through the acceptance of an effect by a correspondent bank or the issuing bank. The third form is through deferred payment without support for differences in exchange rates.
Once the credit is submitted and accepted, the exporter will submit all documentation that proves that the delivery was done according to the documentary credit. This bank will forward this information to the buyer. The bank will proceed to the payment of the merchandise if the transaction and the shipment were done according to what the documentary credit dictates.
It is important to know the risks that exporters and importers incur when using documentary credit.
Documentary credit is not free of risks for the parties to the contract. There are still two types of risks: the documentary risks and the risks of non-payment.
The first risk has to do with decryption. Documentary risks are related to discrepancies that may exist between what actually arrive at the port or airport and what the letter of credit indicates. The importer risks receiving products of a quality different from what was expected. Fraudulent transactions and errors in the decryption of the documents may also be mentioned as possible risks.
Banks are responsible of the verification process of the shipment documents. Any error in the documentation must be detected by the bank and corrected with the exporter. The issuing bank will verify that the shipment and the products received are in the conditions agreed on the documentary credit.
The second risk has to do with non-payment.
The bank is also taking risks because if the buyer fails to deposit the money that will be given to the seller, it is the bank that must comply with the contract. The banks also have the risks of failure in transferring the money from one country to the other when the importer reports insolvency.
The banker of the importer might in any event not to be reimbursed by the client unless it took the precaution of blocking the funds. Added to this risk is also the possibility of foreign exchange risk if a hedging was not planned.
About the Author:
Wade Henderson - recognized Professional - 15 yrs in the Business Finance Field - strong reputation for getting the deal done. IMMFinancial.com Letter of Bank Export Documents You are welcome to reprint this article - but get your own unique content version here.
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