If you want to get into exportation, you must know that the opportunities come with a significant amount of risks. An export documentary credit is among the efficient risks management tools used by season exporters.
Advantages Of Export Documentary Credit
First, it can help minimize the risk of non-payment by your customers. If you issue a documentary credit, the bank of your customer must pay you upon presentation of the export documents.
Second, using this will provide you access to funds without the need to draw from the credit facilities of your company. You just need to present the required documents to your banks. When these documents won’t comply, your bank will provide you with an advance once your documents are accepted.
It is very important for you to choose the right bank to partner with as this can help make sure that you avoid problems related to document compliance.
Who Needs A Documentary Credit?
Companies wanting to minimize the risk of non-payment – This can actually be achieved by utilizing bank channels in order to control commercial documents.
Exporter with customers who are unable or unwilling to provide documentary credit
Companies that need to quickly process documents and resolve payment problems
Companies wanting to provide a very flexible credit term to buyers without the need to compromise their position in cases of non-payment.
How It Works?
You and your buyer must first agree on using this solution as the form of payment. Both of you must sign a contract. After that, your buyer must apply for a documentary credit. The bank, on the other hand, needs to determine if your buyer is credible and qualified. When the requirement of such bank is satisfied, it will then provide the documentary credit. And this document will be forwarded to your bank.
When your bank received these documents, it needs to authenticate the documents and make sure that these adhere to the terms and conditions. Your bank will also notify you that it already received the documentary credit. You, on the other hand, must check if the documents will match the stipulations in your contract with your buyer. When there are discrepancies, you must ask your buyer to resolve such.
You can then ship the orders of your buyer after that as well as present the required documents to your bank. Your bank needs to verify these documents and forward it to the bank of your buyer to request for payment.
Lastly, the bank of the buyer must examine these documents. After which, it will forward the payment to your bank.