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Documentry Credits

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Methods of payment in international trade:

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Economic development and commercial exchange necessitate means of payment that consider the increasing complexities of the trading process and the equipment used in those processes .. together with the diversity of the cultures involved in the process.

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All consider banks to facilitate the exchange of funds in the smoothest way possible, besides being a trusted medium of international trade.

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        * Payment against collection


        * Payment against a documentary credit.


Advance Payment:

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  Documentary Credits  

This is the situation where imported goods are paid for in advance, before receipt of the consignment or even the shipment documents. There are many conditions calls for advance payments including the creditworthiness of the buyer, the ability to pay, or when there is a volatile political and economic situations of the country.

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Payment against Collection:




The seller (exporter) ships the goods to the buyer (importer), and the shipping documents are sent to the buyer's bank. The consignment will only be delivered to the buyer upon immediate reimbursement or upon timed agreed-upon installments.

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Payment against a documentary credit:

  Point of Sale    

This very similar to (payment against collection), the only difference being that the direct payer is the bank not the buyer. The documentary credit is a legal document when the bank has to honor upon presentation.



The documentary credit is considered the safest method of payment (for the seller) and guarantees the completion of transactions (for the buyer) at the same time.

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Documentary Credit:


Commercial letter of credit provided for payment by a bank to the named beneficiary, usually the seller of merchandise, against delivery of documents specified in the credit.


Parties of Documentary Credit .....




The person(s) applying for the documentary credit. It is usually the buyer (importer) in the trading contract. The applicant has got to be a client of the bank.


Issuing Bank:


The bank which issues the documentary credit upon request and instruction of its client. The (doc credit) is an obligation to the bank and thus has to comply with all the legal requirements of the various authorities.




This the party who benefits from the documentary credit. Usually referred to as the Exporter or the Seller. This party has to comply with the conditions of the (doc credit) to receive the payments agreed upon in the contract.


Advising Bank:


This is the bank which advises the seller that a documentary credit has been issued to his/her/their benefit. (the beneficiary's bank). It has to make sure that the beneficiary is advised as soon as possible using the fastest telecommunication method available. It can also be the "confirming" bank.


Confirming Bank:


This is the bank which the issuing bank request it to add its confirmation to guarantee payment to the beneficiary any time the document is presented and scrutinized to ascertain it meets the conditions. This is in addition to the guarantee of the issuing bank.




Is the bank which buys the documents ,after inspection, when presented by the beneficiary. This is usually done when there is a confirmation to the LG and the conditions clearly indicates transferability.


















Documents against acceptance - instructions given by an exporter to a bank that the documents attached to the draft for collection are deliverable to the drawer only against his or her acceptance of the draft. This normally done for Unconfirmed L/C.










Paying Bank or Nominated Bank:













Is the bank which pays the value of the Documentary credit. It is usually the confirmation bank.







Covering Bank:













When the issuing bank does not have an account with the paying bank, the covering bank is the intermediate bank which pays the paying bank. The documents should be transferred to the correct destination to ensure that the LC is effected properly.







Types of Credit ...









Revocable L/C:









A revocable letter of credit can be amended at any time by the issuing bank without prior advise to the beneficiary. Since this is normally unacceptable in trade, it is only in rare occasion that it is used. This type has to be paid upon presentation on SIGHT (order signed by the drawer asking the drawee to pay the amount due the payee upon demand. In many cases the drawer and payee are the same) and can not be confirmed.


Irrevocable L/C:









letter of credit, valid for a stated period of time, that may be cancelled or amended only by agreement of all parties to the credit. The issuing bank waives its right to revoke a letter of credit prior to the expiration date, unless the consent of the beneficiary is obtained.