| Documentary Letters of Credit |
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| TARGET
USER: |
Companies seeking to reduce the risks
associated with exporting into and/or importing from foreign markets. The use of documentary letters of credit
reduces the risk to both buyer and seller in an international sale and can be
used for one-time or recurring transactions.
The title documents to a shipment and the payment for the same are
exchanged between the exporter’s and importer’s banks, respectively. As long as the shipment meets the standards
established between the parties, payment is guaranteed. |
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| ADVANTAGES: |
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The exporter can expand its revenue base by selling into foreign
markets with limited payment risk. |
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The importer can buy from foreign markets with limited risk of
non-shipment. |
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| DISADVANTAGES: |
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Adds costs to The product: typically each party pays their own
transaction costs. |
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| HOW
TO APPLY: |
Contact a bank that has a documentary letter of
credit department.
The exporter will need a bank that can advise or confirm its incoming
letters of credit and assist in producing the documents required for payment
under the letter of credit.
When a bank issues an outgoing letter of credit on behalf of an importer it
is considered a credit obligation, just like a loan. The letter of credit can be issued under an
existing credit line or documented and secured separately.
For further information on documentary letters of credit, visit the web
site of the International Chamber of Commerce (“ICC”), the governing body for
documentary letters of credit, at www.iccwbo.org. Consider buying and reading “Guide to
Export-Import Basics” available on their website bookstore. |
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| Source: Economic
Development Council |
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