Question

Compare and contrast documentary letter of credit with documentary collection. What is banker’s acceptance?

Answer 1

DOCUMENTARY LETTER OF CREDIT

These are financial transaction made through SWIFT( Society for Worldwide Interbank Financial Telecommunications) which issued by the banks and other financial institutions. Here the seller recieve payment from the buyer when all terms and condition of the contract is fulfilled. If the buyer can not pay after the completion of the contract then seller will demand for the payment of the same.This letter of credit mainly use in the international transaction takes place.This is used for avoiding the risk factor with the help of trusted banks and institutions.

DOCUMENTARY COLLECTION

Documentary collection process is done by the banks where banks act as a fund collecter for the exporter from the importer. Here the exporter ask for the help of the bank for the collection from the importer. The collection is for the payment of shipped documents and other transaction in the international trade.These are actually documents collection for the purpose of making the payment fulfiled.

Letters of credit is developed for ensuring that sellers will receive payment for goods that have been properly shipped and the correct documents are presented on delivery. For buyers, a letter of credit ensures that the buyer need not to pay for the goods when letter of credit is fulfilled. Letters of credit can be considered as the most important international payment methods,for all industries. There documentary collection, that may reduce some of cost and burden of the transaction. There are differences between documentary collection and letter of credit. Documentary collection can be used to exchange the needed documents so that there will not be that ,uch cost and barriers. In documentary collection it is different from the letter of credit, that the bank need not to pay the exporter if the buyer decides that it does not want to buy. But in the letter of credit this circumstance will be different that the banks initially needs to pay the seller for the transafer of the funds because here the fund transfers are held between two parties.

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