What are the advantages of a documentary credit to an exporter and an importer?

Question

What will be an ideal response?

Answer 1

Answer:
Documentary credits offer a number of advantages to exporters:
1. The most important advantage of a D/C is that it substitutes the creditworthiness of the bank for the credit risk of the importing firm. The exporter therefore must only be concerned with the credit risk of the bank that issues the D/C. If the exporter satisfies the requirements of the D/C, the exporter will be paid by the bank.
2. Establishing a documentary credit enhances the probability that the exporter will not experience delays in payment due to the imposition of foreign exchange controls or other political risks. Countries are well aware of the importance of international trade. As a result, governments generally permit banks to honor existing documentary credits. Failing to do so severely damages a country's reputation and its ability to borrow in international financial markets in the future.
3. A D/C reduces the uncertainty of a transaction by clearly establishing the acts that the exporter must carry out in order to receive payment.
4. Because a D/C is a legally binding document between a bank and an exporter, the exporter is protected if the importer desires to cancel the contract during the production processes. This is especially important if the goods are being made to order.
2) What are four different methods by which an exporter can accept payment from an importer? List them in increasing order of risk to the importer.
Answer: There are at least four different methods available for an importer to pay an exporter. The most straightforward method and the one that is the least risky from the exporter's perspective is to require cash in advance. The next least risky method is a documentary credit, then a documentary collection, and finally an open account, which is the least risk to the importer and the most risky method of payment from the exporter's point of view. The last method allows the importer to resell what he or she has imported from the exporter and, in turn, pay back the exporter while retaining a margin of profit.