If you want to venture into export, you should know that opportunities carry a significant amount of risk. An export documentary credit is one of the efficient risk management tools used by seasonal exporters.

Advantages of export documentary credit

First, it can help minimize the risk of default on the part of your customers. If you issue a letter of credit, your client’s bank must pay you when you present the export documents.

Second, using this will give you access to funds without having to draw on your business lines of credit. You only need to present the required documents to your banks. When these documents do not comply, your bank will provide you with an advance once your documents are accepted.

It is very important that you choose the right bank to partner with as this can help you avoid issues related to document compliance.

Who needs a documentary credit?

Companies that want to minimize the risk of default: This can be achieved by using banking channels to control business documents.

Exporter with clients who are unable or unwilling to provide documentary credit

Businesses that need to process documents quickly and solve payment problems

Companies that want to offer a very flexible credit term to buyers without having to compromise their position in case of default.

How does it work?

First, you and your buyer must agree to use this solution as a form of payment. Both must sign a contract. After that, your buyer must apply for a documentary credit. The bank, on the other hand, needs to determine if its buyer is credible and qualified. When the requirement of said bank is satisfied, then it will provide the documentary credit. And this document will be sent to your bank.

When your bank received these documents, you need to authenticate them and make sure they meet the terms and conditions. Your bank will also notify you that you have already received the letter of credit. You, on the other hand, should check whether the documents match the stipulations in your contract with your buyer. When there are discrepancies, you should ask your buyer to resolve them.

You can then submit your buyer’s orders and submit the required documents to your bank. Your bank should verify these documents and forward them to your buyer’s bank to request payment.

Finally, the buyer’s bank must examine these documents. After which, you will send the payment to your bank.