Disadvantages Of Documentary Credit

Methods of payment in international trade ranking in order of increasingly risk to the exporter are “Payment in Advance” (or “Prepayment”), “Documentary Credit (DC)” (or “Letter of Credit (LC)”), “Documentary Collection”, “Clean Collection” and “Open Account”.

2. Payment in Advance (Cash with Order)

2.1 The importer pays the exporter in full before shipment is made. This method is usually used only for small purchase (e.g. samples), when the goods are built to order or when the goods are badly needed.

1. Importer pays exporter before delivery of goods Importer / Exporter / Buyer Seller 2. Exporter ships the goods

3. Documentary Credit (Letter of Credit)

3.1 Documentary credit is an instrument issued by a bank (named issuing or opening bank), at the request of the buyer, evidencing the bank’s undertaking to the seller to pay a certain sum of money provided that specific requirements set out in such instrument are satisfied.

3.2 A documentary credit provides the exporter with a secure method of payment, provided that he complies with certain terms and conditions stipulated in the credit. This is the most significant aspect of documentary credits.

3.3 Thus, a documentary credit is a conditional guarantee of payment by the issuing/ opening bank. The guarantee is conditional upon the exporter fulfilling certain requirements (e.g. shipment of the goods in due date, punctual presentation of documents required, & etc.).

4. Collection (Clean vs Documentary)

4.1 A collection service offered by a bank provides a means by which an exporter in one country can obtain payment from an importer in another country.

4.2 A clean collection: a collection of financial documents not accompanied by commercial

original bill of lading) are sent directly by the exporter to the overseas importer.

4.5 A documentary collection: a collection involving commercial documents, i.e. either

(a) financial documents and commercial documents together; or

(b) commercial documents only.

4.6 For a documentary collection, the bank may be instructed by the principal to release the commercial documents to the importer only against payment for the goods. This form of documentary collection is referred to as D/P (Documents against payment).

4.7 Alternatively, the bank may be instructed to release the commercial documents to the importer only against immediate acceptance by the importer of a bill of exchange, drawn on him by the exporter. This form of documentary collection is referred to as D/A (Documents against acceptance).

4.8 In case of D/A collections, the importer receives the commercial documents on accepting the bill of exchange which will then be held by the collecting/ presenting bank until it matures and then presented to the importer for payment at that time.

5. Open Account

5.1 The seller delivers the goods directly to the buyer, sends the invoice and other shipping documents first and asks the importer to pay