Image by CHUTTERSNAP

LETTERS OF CREDIT & DOCUMENTARY COLLECTIONS

A Comprehensive Approach

Letters of credit and documentary collections are used to de-risk trading internationally.  With a letter of credit as long as the terms are met and it is raised by a reputable bank you will get paid.
Documentary collections are less secure as they are not backed by a bank.  The benefit for the seller is that the bank will not release the documents of title until the terms of of the collection are met.

 

LETTER OF  CREDIT  COMPARED TO DOCUMENTARY COLLECTION

Our consultants can help you navigate the tricky waters of trade documentation and risk.  We can also assist with introducing banking partners that will work with YOU.

LETTERS OF CREDIT

Payment Guaranteed By The Bank If The Terms Of The Contract  Are Met.

A letter of credit is a document from a bank that guarantees payment. There are, several different types , and they can provide security when buying and selling products or services.

  • Seller protection: If a buyer fails to pay a seller, the bank that issued a letter of credit must pay the seller as long as the seller meets all of the requirements in the letter. This provides security when the buyer and seller are in different countries.

  • Buyer protection: Letters of credit can also protect buyers. If you pay somebody to provide a product or service and they fail to deliver, you might be able to get paid using a standby letter of credit . That payment can be a penalty to the company that was unable to perform, and it’s similar to a refund. With the money you receive, you can pay somebody else to provide the product or service needed.

Banks act as "disinterested" third parties. The bank doesn’t take anybody's side, and banks release funds only after certain conditions are met. Letters of credit are common in international trade, but they are also helpful for domestic transactions like construction projects.

Image by Etienne Martin

DOCUMENTARY COLLECTIONS

The Documentary Collections payment method is an approach used for merchandise and commodity exports. Generally recommended in situations where there is an established and ongoing trade relationship with a trusted buyer, this method can simplify your export transaction, offer faster payment, and reduce costs when compared to Letters of Credits. 
In a Documentary Collections transaction, the exporter’s and the importer’s banks facilitate the export sale by exchanging shipping documents for payment. However, the banks do not verify that the documents are accurate and do not guarantee payment as they do with Letters of Credit. As a result, Documentary Collections are only recommended for established trade relationships in economically and politically stable markets. 
While there are several benefits to the Documentary Collections payment method, each export transaction is unique. We recommend you take advice when considering this method of trading.

Signing Contract