Trade Finance- Documentary Bills and Letter of Credits

Trade finance represents the financial instruments and products that are used by Banks to facilitate international trade and commerce. Trade finance makes it possible and easier for importers and exporters to transact business through trade. Trade finance covers many financial products that banks and companies utilize to make trade transactions feasible.

Benefits
1. Trade finance represents the financial instruments and products that are used to facilitate international trade and commerce.
2. Trade finance makes it possible and easier for importers and exporters to transact business.
3. Trade finance can help reduce the risk associated with global trade by reconciling the opposing needs of an exporter and importer.

Letter of Credit (LC) also known as Documentary Credit is a method of payment where the buyer’s bank
guarantees payment to the seller with the condition that the seller has to fulfil the terms specified in the
L/C.

Benefits
1. The seller reduces the risks of not getting paid
2. The seller can offer longer payment terms (credit) to the buyer and still get paid quickly
3. Eliminate the risk related to the buyer’s bank and country with a confirmation (guarantee) of the LC.
4. The banks involved will act according to the internationally accepted rules.

A documentary collection is a transaction in which a bank accepts the task to collect payment on behalf of the seller by delivering the corresponding documents to the buyer. Documentary collection offers greater security as it prevents the buyer from taking possession of the goods before either paying or accepting a bill of exchange. Documentary collections are very suitable in cases where the exporter is reluctant to supply the goods on an open account basis but does not need the degree of security provided by a
documentary credit.