If you want to get into export, you need to know that the opportunities involve a significant amount of risk. An export documentary credit is among the effective risk management tools used by seasonal exporters.
Benefits of exporting documentary credit
First, it can help minimize the risk of non-payment from your customers. If you issue a documentary credit, your client’s bank will have to pay you when presenting the export documents.
Second, using this will give you access to funds without the need to deduct from your company’s credit facilities. Simply present the required documents to your banks. When these documents do not comply, your bank makes an advance when your documents are accepted.
It is very important for you to choose the right bank that you can partner with as this can help you avoid document compliance issues.
Who needs a documentary credit?
Companies that want to minimize the risk of non-payment – This can actually be achieved by using bank channels to check commercial documents.
Exporter with customers who are unable or unwilling to provide documentary credit
Companies that need to process documents quickly and resolve payment issues
Companies that want to provide a very flexible credit period to buyers without the need to compromise their position in case of non-payment.
How does it work?
You and your buyer must first agree to use this solution as a form of payment. You both have to sign a contract. Then, your buyer must apply for a documentary credit. On the other hand, the bank must determine if your buyer is trustworthy and qualified. When the requirement for such a bank is met, it then gives the documentary credit. And this document will be forwarded to your bank.
Once your bank receives these documents, it must authenticate the documents and ensure that they comply with the terms and conditions. Your bank will also notify you that it has already received the documentary credit. On the other hand, you must check whether the documents are in accordance with the terms of your contract with your buyer. When there are discrepancies, ask your buyer to resolve this.
You can then send your buyer’s orders accordingly and present the required documents to your bank. Your bank must verify these documents and forward them to your buyer’s bank to request payment.
Finally, the buyer’s bank must examine these documents. It will then forward the payment to your bank.