Documentary Credit And Its Benefits To International Trade
The most commonly used forms of documentary credit are the letters of credit. They allow exporters and importers to have an equally balanced business relation. Documentary credit allows for the provider of the service or seller of the merchandise to be paid based on the terms of the agreement upon delivery. The importer wins by receiving products of the quality and quantity that he or she was expecting.
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 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.
