What is the commonest method of payment for trade between countries?
Why?
Payment method is one of the top concerns of businesses when participating in
international commercial contracts. Among many methods of payment for trade
between countries, Documentary Credit is the most common one. Documentary Credit,
which is often referred to as Letter of Credit, is a commitment by a bank on behalf of
the importer that payment will be made to the exporter, provided that the terms and
conditions stated in the Letter of Credit have been met. Based on this, Documentary
Credit can minimize risks for both the buyer and the seller.
On the one hand, a Letter of Credit can eliminate the risk of non-payment for the
exporter. Letter of Credit is autonomy, which means that it is a separate agreement from
a sale contract. The issuing bank is obliged to pay as long as the seller presents all
required documents stated in the Letter of Credit. Therefore, in the event that the
importer fails to make the payment on the goods purchased, the bank will be responsible
for covering the full or remaining amount of the purchase and the exporter receive the
money on time and for the correct amount.
On the other hand, Documentary Credit also protects the importer from the risk of
wrong goods, missing goods, or inferior goods. Letter of Credit has an important
principle which is strict compliance. The issuing bank will only pay if the shipping
document is exactly in line with the buyer’s instructions. Thus, in the case any
discrepancies are found, the bank will refuse to pay under the Letter of Credit. In that
situation, the exporter is forced to provide the missing paperwork or correct errors.
In conclusion, thanks to its outstanding advantages, Documentary Credit becomes
a widely used international payment method around the world.