| Documentary credit is an instrument that allows | | | | Through the Letter of Credit a bank works as an |
| businesses to be engaged in successful trade export | | | | intermediary between sellers and buyers to do |
| relations. These documents allow international trade | | | | business. After the seller has shipped the |
| to overcome the challenges given by the distance | | | | merchandise, the bank will make sure that the latter |
| involve in such relations. | | | | is what the buyer had requested (in both quality and |
| The most commonly used forms of documentary | | | | quantity). Then bank will then make the |
| credit are the letters of credit. They allow exporters | | | | reimbursement to the seller and later grant the |
| and importers to have an equally balanced business | | | | importer the possession of the merchandise. |
| relation. Letters of credit in their variations allows for | | | | Thus, the buyer does not transmit any funds to the |
| the provider of the service or seller of the | | | | seller until it has received documentary credit to take |
| merchandise to be paid based on the terms of the | | | | possession of the goods and the seller receives |
| agreement upon delivery. The importer wins by | | | | payment once it has shipped, provided that the |
| receiving products of the quality and quantity that he | | | | requirements have been met. |
| or she was expecting. | | | | Therefore, documentary credit springs from the |
| The Letter of Credit credit is used around the world | | | | following needs posed by international trade: |
| by many countries with the objective of reducing the | | | | One: the need for the exporter to have a written |
| conflicts of interest that may exist between sellers | | | | commitment of importer to pay for the merchandise. |
| and buyers. For instance, the ideal transaction for the | | | | Using documentary credit, the seller will get paid by |
| exporter is the one when it pays right after receiving | | | | the bank if the buyer is unable to. |
| the goods. Conversely, for the importer an ideal | | | | To assure the importer that the payment by the |
| scenario is when he or she receives payment before | | | | bank will only be made if the seller can show that it |
| shipping the merchandise. | | | | has properly performed its contractual obligations. |