In international trade, the amounts and remoteness of the partners involve the creation by the bank of a specific payment instrument called documentary credit.
One of the most widely known forms of documentary credit is the letter of credit. Through these types of documents importers and exporters guarantee that their trade conditions are equal and beneficial to both parts. Documentary credit guarantees that the seller receives payment for the merchandise it was sent. This is beneficial for the buyer as well because the merchandise is paid only when the quality and quantity received was the one expected.
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.
Documentary credit allows the buyer to take possession of the merchandise when it has paid for it, and the seller will receive the money only when it has proven that it has shipped it according to the agreement.
The technique of the documentary credit therefore solves two big dilemmas of international trade:
Commitment from the importer to the exporter. The bank will pay the exporter for the merchandise even when the importer has problems to do it.
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.
One of the most widely known forms of documentary credit is the letter of credit. Through these types of documents importers and exporters guarantee that their trade conditions are equal and beneficial to both parts. Documentary credit guarantees that the seller receives payment for the merchandise it was sent. This is beneficial for the buyer as well because the merchandise is paid only when the quality and quantity received was the one expected.
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.
Documentary credit allows the buyer to take possession of the merchandise when it has paid for it, and the seller will receive the money only when it has proven that it has shipped it according to the agreement.
The technique of the documentary credit therefore solves two big dilemmas of international trade:
Commitment from the importer to the exporter. The bank will pay the exporter for the merchandise even when the importer has problems to do it.
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 Standby Letter of Credit Advance Letter of Guarantee
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