Why might different documentation be used for an export to a nonaffiliated foreign buyer who is a new customer, as compared with an export to a nonaffiliated foreign buyer to whom the exporter has been selling for many years?
What will be an ideal response?
Answer: A new nonaffiliated buyer presents a credit risk for the exporter, because the exporter may be unable to assess the creditworthiness of that importer due to geographic distance, language, culture, or lack of a record of payments to other suppliers. A letter of credit, accompanied by other documents, allows the exporter to rely on the credit standing of a bank, which is presumed to be of greater creditworthiness than just an unknown manufacturing firm.
After successful trade goes on for some time the importer becomes a known entity, in which case the exporter will have more faith in the importer's willingness and ability to pay. Because the letter of credit and other documents have both a financial cost and a cost for the time and energy involved in handling the documents, direct billing for exports is easier, faster, and lowers the final end-cost to the ultimate customer.
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