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State the different steps involved in a confirmed documentary letter of credit, with payment terms of ninety days sight. Then compare and contrast documentary collections and documentary letter of credit - Essay Example

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The buyer and the seller first of all have to agree to do business and then the seller requests for a letter of credit that serves as a guarantee for payment. It is then the responsibility of the buyer to apply for a letter of credit from his bank in favour of the person…
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State the different steps involved in a confirmed documentary letter of credit, with payment terms of ninety days sight. Then compare and contrast documentary collections and documentary letter of credit
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Extract of sample "State the different steps involved in a confirmed documentary letter of credit, with payment terms of ninety days sight. Then compare and contrast documentary collections and documentary letter of credit"

Documentary Collections and letters of Credit al Affiliation Steps Involved in a Confirmed Documentary Letter of Credit The buyer andthe seller first of all have to agree to do business and then the seller requests for a letter of credit that serves as a guarantee for payment. It is then the responsibility of the buyer to apply for a letter of credit from his bank in favour of the person selling. After the buyer’s bank approves the credit risk associated with the buyer, the bank ensures that the credit reaches its correspondent bank which has the responsibility of advising or confirming the request (Azar & Abdallah, 2015).
It is the advising bank which then declares the credit authentic and sends the original credit to the seller who in this case is the beneficiary. Afterwards, the beneficiary or the seller then transports the goods and comes up with the documents required to support the letter of credit. It is after presenting the relevant documents to the advising bank or the confirming bank that the documents can be processed for any payments to be done (Barru, 2005).
The confirming or advising bank scrutinizes the documents to establish compliance with the provided letter of credit. In the event that the details are correct, the advising or confirming bank can put claims of funds through either obtaining a debit from the issuing bank’s account, waiting for some period of time to allow the issuing bank to remit or through any other bank as per the requirements of the credit. After this, it will be upon the advising or confirming bank send the documents to the issuing bank which again examines the papers for compliance and in case there are no complications, the issuing bank debits the account of the buyer. Finally, the issuing bank performs yet another duty of sending the documents back to the buyer (Azar & Abdallah, 2015).
Similarity between Letters of Credit and Documentary Collections
One of the similarities between the documentary collections and letters of credit is that the execution of both of these payments is performed by the banks. Moreover, documents are very essential in both of the payments and this becomes the second similarity between the two methods of payments. The third similarity is that both of these documents are governed by rules of trade which are accepted internationally (Barru, 2005).
Differences between Letters of Credit and Documentary Collections
The main differences between the two methods of internal payments occur in the areas outlined below:
Governing rules
While the letters of credit majorly fall under the governance of UCP 600, cash against documents payments in this case referred to as documentary collects fall under the governance of the rules outlined in URC 522 (Ilie, 2015).
Flow of transactions
For the letters of credit to be opened by the bank that issues them the applicant must be willing to accept the banks request to open them or in other words the applicant must authorise the opening of the letter of credit. The applicant in a letter of credit in this case plays the role of the importer hence letters of credit are basically initiated by the importers who are the applicants. On the contrary, documentary collections of the cash against documents are initiated by exporters (Cooley, 2010).
The degree of risk
It is evident that many applicants settle for letters of credit when it comes to risk assessment as they generally feel that the letters of credit are a more secure method of international payments as compared to the cash against document or the documentary collections.
The banks’ responsibilities
Basically, banks play a very major role in administering the transactions involved in letters of credit and express a high level of responsibility against the exporters involved in the letters of credit. The opposite is true for documentary collections whereby the banks play a very minute role in the responsibilities of exporters (Barru, 2005).
Complexity
It is easier to operate with documentary collections as compared to operating with letters of credit which relatively more complex.
Cost of transaction
Letters of credit are some of the most expensive methods of payment in the international trade as compared to documentary collections which are relatively cheap (Ilie, 2015).
References
Azar, S. A., & Abdallah, K. (2015). The demand for import documentary credit in Lebanon. International Business Research, 8(2), 111-120. http://search.proquest.com/docview/1658410695?accountid=45049
Cooley, J. W. (2010). Using a foreign exchange online portal in lieu of commercial letters of credit for small businesses in the international import arena. Journal of International Business and Cultural Studies, 3, 1-7. http://search.proquest.com/docview/759652837?accountid=45049
Ilie, D. (2015). Credits And Bank Guarantee Letters In Entrepreneurship Development During Crisis. Amfiteatru Economic, 17(38), 212-227. http://search.proquest.com/docview/1652466421?accountid=45049
Barru, D. J. (2005). How to Guarantee Contractor Performance on International Construction Projects: Comparing Surety Bonds with Bank Guarantees and Standby Letters Of Credit. The George Washington International Law Review, 37(1), 51-108. http://search.proquest.com/docview/219698327?accountid=45049 Read More
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