Question

1. Explain in detail the difference between Documentary Letter of Credit and Documentary Collections. Also describe the possible risks and where best used in International Trade.

Answer 1

The documentary letter of credit helps the buyers and sellers to complete the transactions assume unnecessary risk. Buyers want receiving assurance and sellers want assurance of receiving payment. If a consumer wants to purchase something from foreign market, the buyer will approach their bank and request for opening a letter of credit which is a favour for seller. Under the documentary collection the seller ship the product or service and present the commercial invoice to buyer’s bank.
In international business a number of payment mechanisms used.
Letter of credit is an agreement between buyers and sellers through bank, which guarantee to give, pay the seller.
The difference between both of this is its documentation and presentation requirements at delivery.
In letter of credit the seller will receive payment if they present the exact document. The presentation of these documents makes risk in international market. The buyer feels comfortable only after conducting a large number of transactions. In international trade the seller drop requirements with buyer, in between this there is a chance for high risk. The buyer only gives the document when the documents are satisfied by the seller.