Use the appropriate method to secure your transactions
Documentary techniques offer a range of advantages both to importers and exporters. They provide a framework for international transactions so that both parties can exchange goods and payments on pre-agreed terms which are then controlled by their respective banks.
Documentary techniques include documentary collection and documentary credit.
Documentary collection ensures that the goods are only delivered against remittance of a payment order or acceptance of a draft. This may appear at first sight as a good way of securing the transaction but it should be stressed that it is not risk-free, since the buyer may fail to collect the goods or turn out to be insolvent.
Better security can be obtained by using documentary credits, where a bank commits itself to pay for the goods provided the documents presented comply with the terms of the credit.
If you are an importer, documentary credit offers you full security that the goods ordered will only be paid for if the documents presented comply with your instructions as specified in the credit.
As an exporter, because of the irrevocable undertaking from the buyer's bank, you are certain of payment by the importer if the documents comply with the terms of the credit and are presented within the specified term.
If the credit is also confirmed by your bank, you are not exposed to any risk on the issuing bank or to the political risk on the importer's country.