Sometimes, buyers do not pay promptly and the seller has to suffer but the business world has developed few methods to ensure fair dealing. There is a fine line between these methods. Most of the people they are same and they are often referred as interchangeable. Though, the basic function of both methods is same but there are few small technical differences that make a distinction. Bank has no responsibility in the latter method. A letter of credit is a trustworthy method and that is why most of the sellers prefer this method of payment.
The bank is the issuing authority in both cases. As international trade is flourishing, trade organizations around the world have welcomed the move with numerous privileges to the investors. In India, too, the government has loosened many trade laws to attract investors.
Since banks are trustworthy institutions, their utilization in safeguarding trading practices relieves emerging traders of apprehensions. However, some fraudsters manage to breach contracts and violate the rightful trading paradigm.
Many countries have trade laws, while many do not. This makes the businesses in these countries vulnerable to a collapse. The Punjab National Bank fraud of is an example of such a breach.
Another example is the recent case in which a country sent faulty medical equipment, although it had earlier promised to deliver quality products. Skip to content Industrialization and globalization are commonly used terms in world trade nowadays.
What is Letter of Credit? What is Documentary Collection? Main Differences Between Letter of Credit and Documentary Collection Both letters of credit and documentary collection are stakeholders in international trade. There are, however, many differences between the two.
A letter of credit requires the seller to present certain documents as follows:. Bill of lading — A bill of lading represents the legal title for the goods being shipped. It is usually negotiable, and the holder has title to the merchandise.
Sight draft — A draft is a demand for payment for a specific amount and within a certain time frame. Commercial invoice — The invoice lists the items being shipped and the amount of the purchase. Insurance certificate — An insurance certificate covers any loss or damage to the merchandise while in transit.
International Trade Administration. Export-Import Bank of the U. Privacy Shield Framework. Trade Finance Global. Documentary credit is very similar to a letter of credit, and facilitates international payment transactions.
For the payment to be made, a number of specific documentation needs to be submitted, which could include goods purchase invoice, bill of lading, inspection documentation, insurance proof, etc.
Letters of credit ensure that the seller will be able to obtain the payment for goods and services that have been shipped or delivered upon presentation of the documentation at the time of delivery. Letters of credit are beneficial to both the buyer and seller.
Letters of credit give the buyer the right to inspect whether correct documentation verifies the quality of the goods, and the seller is guaranteed payment as long as all terms and conditions stated are met. Documentary credits are a type of Letters of credit which are international payment mechanisms that are both quite similar to one another.
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