Confirmation of a Letter of Credit
A letter of credit is one of the instruments of exchange that is mainly used to facilitate import and export transactions. A letter of credit is an instrument of exchange that is issued by the buyers bank (TD 4). In this transaction, the buyer is the importer and through his bank, he/she promises to pay the exporter for the goods provided. For this to happen, there are a number of steps that have to be followed to confirm the letter of credit.
The first step involved in this process is the agreement between the buyer (importer) and the seller (exporter) to come to an agreement of purchase of goods and services using a letter of credit as an instrument of exchange. At this point, the buyer needs to instruct his/her bank to make a letter of credit in favor of the seller. However, for this to be done, the buyer importer needs to have a desirable line of credit with the bank. The issuing bank is supposed to send the letter of credit to the advisory bank. In most cases, this bank is situated in the country that the exporter resides in and maybe the one, which he/she conducts his transaction with. Here, the advisory bank confirms the authenticity of the letter of credit. Once the letter has been regarded as valid, a copy of the same is sent to the exporter to ensure that it corresponds to the terms and conditions that had been set for the transaction, the required documents can be produced and whether or not these terms and conditions can be met (TD 6). If there are any irregularities with the terms of the letter of payment, the exporter is expected to notify the importer at once to rectify it. The amendments that are made to the letter of credit have to be agreed upon by both parties. However, the exporter is not expected to make any shipment that goes against the original requirements until the amendments are received by the advisory bank. After this, the exporter arranges the manner in which the goods shall be shipped to the importer. Here, he/she has to adhere to the terms set by the agreement and provide the necessary documentation. Upon a careful examination of this entire process, the advisory bank obtains money from the importer for the entire transaction. Finally, the importer receives the documents that confirm his/her ownership of the goods. The entire process comes to a conclusion when the importer possesses the goods and the exporter received the money (TD 6).
Comparison of Documentary Collections and Documentary Letter of Credit
A documentary letter of credit is a document that is issued by the bank of the importer to the bank of the exporter as an instrument of exchange (Sherman 2). On the other hand, a documentary letter of the collection is a document that an importer possesses in order to collect the goods that have been sent to him/her by an exporter. Thus, while a letter of credit is issued as a means of payment for the goods that have been provided, a letter of the collection is required to collect the goods from a transportation company by the importer. This is the main difference that exists between them.
Before a letter of credit is issued, several conditions have to be met. This includes the delivery of goods to the importer. In addition, several documents also have to be presented. This includes an invoice acting as an exhibit of the purchase and a certificate of origin (Sherman 3). On the other hand, a document of collections is sent to the importer via his bank. These documents, together with the other documents that have been sent by the exporter are need to be possessed by the importer while collecting the goods. Therefore, before this is done, the importer needs to have paid all the sums of money that are required to complete the transaction. Therefore, these documents are essential in facilitating an import/export transaction.
Sherman, Fraser. n.d. Difference Between a Documentary Collection & a Letter of Credit. n.d. Web. 2012.
TD n.d., A Guide to Letters of Credit: Import/Export. 2012. Web.