The Payment And The Risks Of Documentary Credit

The payment of documentary credit can be done in the following ways:

Documentary credit can be paid primarily cash using funds from the issuing bank or a designated financial institution in the country of the exporter. Additionally, it can be done using a legal instrument transferring funds from the issuing bank. It can also be paid using payment overdue at a later time making adjustments to the exchange rates.

Once the credit is submitted and accepted, the exporter will submit all documentation that proves that the delivery was done according to the documentary credit. This bank will forward this information to the buyer. The bank will proceed to the payment of the merchandise if the transaction and the shipment were done according to what the documentary credit dictates.

It is important to know the risks that exporters and importers incur when using documentary credit.

Documentary credit involves taking a few risks as well. One is the complications that the documents may involve and another is the risk of not receiving a payment.

The first risk has to do with decryption. Documentary risks are related to discrepancies that may exist between what actually arrive at the port or airport and what the letter of credit indicates. The importer risks receiving products of a quality different from what was expected. Fraudulent transactions and errors in the decryption of the documents may also be mentioned as possible risks.

Banks are responsible of the verification process of the shipment documents. Any error in the documentation must be detected by the bank and corrected with the exporter. The issuing bank will verify that the shipment and the products received are in the conditions agreed on the documentary credit.

The second risk has to do with non-payment.

The correspondent bank paying the seller runs the risk of not being reimbursed by the payer (the banker of the importer). It may also, for example, have difficulties in transferring from the country of the seller to the buyer or a risk of insolvency of the importer.

If in any case the importer failed to pay the bank, the latter can block the funds before making the payments to the exporter. Therefore, banks need to also plan ahead for any changes in foreign exchange rates.

Wade Henderson - recognized Professional - 15 yrs in the Business Finance Field - strong reputation for getting the deal done. IMMFinancial.com (http://immfinancial.com/sblc.htm) SBLC (http://immfinancial.com/sblc.htm)