The collection letter gives instructions that specify the documents required for the transfer of title to the goods. D/Cs involve using a draft that requires the importer to pay the face amount either at sight (document against payment) or on a specified date (document against acceptance). Funds are received from the importer and remitted to the exporter through the banks involved in the collection in exchange for those documents. Documentary CollectionsĪ documentary collection (D/C) is a transaction whereby the exporter entrusts the collection of the payment for a sale to its bank (remitting bank), which sends the documents that its buyer needs to the importer’s bank (collecting bank), with instructions to release the documents to the buyer for payment. An LC also protects the buyer since no payment obligation arises until the goods have been shipped as promised. An LC is useful when reliable credit information about a foreign buyer is difficult to obtain, but the exporter is satisfied with the creditworthiness of the buyer’s foreign bank. The buyer establishes credit and pays his or her bank to render this service. An LC is a commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided that the terms and conditions stated in the LC have been met, as verified through the presentation of all required documents. Letters of credit (LCs) are one of the most secure instruments available to international traders. Thus, exporters who insist on this payment method as their sole manner of doing business may lose to competitors who offer more attractive payment terms. Foreign buyers are also concerned that the goods may not be sent if payment is made in advance. However, requiring payment in advance is the least attractive option for the buyer, because it creates unfavorable cash flow. With the advancement of the Internet, escrow services are becoming another cash-in-advance option for small export transactions. For international sales, wire transfers and credit cards are the most commonly used cash-in-advance options available to exporters. With cash-in-advance payment terms, an exporter can avoid credit risk because payment is received before the ownership of the goods is transferred.
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