The payment of documentary credit can be done in three ways:

Documentary credit can be paid by cash either by the issuing bank or by the correspondent bank. It may also be paid through the acceptance of an effect by a correspondent bank or the issuing bank. The third form is through deferred payment without support for differences in 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.

There are a few risks that financial institutions and importers take 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.

There is a verification process that the issuer bank will perform in order to know the validity of the shipment and the product. If there is any error, the bank should learn it right there and it assumes the responsibility of verifying that the documents are correct.

Banks run a risk of nonpayment from the importer.

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.

The banker of the importer might in any event not to be reimbursed by the client unless it took the precaution of blocking the funds. Added to this risk is also the possibility of foreign exchange risk if a hedging was not planned.

Wade Henderson – recognized Professional – 15 yrs in the Business Finance Field – strong reputation for getting the deal done.
IMMFinancial.com

Letter of Bank
Export Documents

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