Benefits Of Documentary Credit
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.
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 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.
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 use of documentary credit responds to the following two necessities:
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.
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 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.
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 use of documentary credit responds to the following two necessities:
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.
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 of Credit Letters of Credit You are welcome to reprint this article - but get your own unique content version here.