Letter of Credit Basics: Risks in Letters of Credit

Each international trade transaction carries a risk, lower or higher.

Some trade relationships might have been established for a long period of time between importers and exporters, whom are located in safe countries with sound financial backgrounds.

In such a scenario, we can talk about two professional partners, working for a win-win situation, both of them understanding its roles and responsibilities in order to complete the transaction in a good manner.

Concluding these kinds of transactions financially would not be a difficult task.

Now, I want you to think just an opposite scenario. Potential trade is about to initiate between an importer and exporter, whom has no enough knowledge about the counter party. Even more, at least one party is located in a politically unstable country.

What do  you think. Which payment method should be chosen to satisfy both parties under such extreme conditions?

Do you think that you can find a risk free payment method that you can rely on regardless of the surrounding conditions?

Above, I have tried to illustrate two different conditions effecting the payment selection decisions in international trade.

What sort of risks each letter of credit party has to bear in export and import transactions?

On this post, I will try to explain the risks associated with international payment methods in general.

Specifically, I will emphasize the risks in letters of credit for different parties perspectives.

What are the risks of open account payment for importers?

Open account payment is the less risky payment option for importers. 

Generally, under open account terms, importers pay the order amount after they have received the goods.

As a result there is not much thing to worry about for the importers when working with an open account payment term.

Nevertheless on this article I will try to explain you possible risks of an open account payment term for the importers.

What are the risks of open account payment for exporters?

Companies do export and import business in order to make money.

But just like any other businesses, international trade have some risks, the considerable amount of which lays beneath the financial side of the operations. 

An exporter has to bear significant amount of risks when trying to complete an export operation via an open account payment, as the importer only pays the amount of the goods after the goods have been shipped and in most cases after they have been received by the importer.

Today I would like to explain the risks associated with open account payment term for exporters.

What are risks of making air shipments when using documents against payment method?

Documents Against Payment (D/P) is a payment method used in international trade transactions.

This payment method has couple of alternative names such as documentary collections, cash against documents, CAD and documents against acceptance.

There are various advantages of using this payment method in export and import operations.

Some of the advantages of documentary collection payment method can be mentioned as follows:
  • Documentary collection payment method is easy. 
  • Documentary collection is relatively a cheap payment option comparing to letters of credit. 
  • Documentary collection is a fast international payment type comparing to letters of credit.

Despite all of these advantages stated above, documentary collection payment has couple of disadvantages, which have to be burdened by the exporters.