Documentary Credit/ Letter of Credit

Is a payment mechanism used in international trade which functions as a guarantee whilst allocating the risk undertaken by contracting parties.

How does Documentary Credit work?

Documentary Credit works by creating a guarantee by Financial Institution which undertakes to vouch for one of the parties of the Transaction to pay to the counterparty, provided that the terms and conditions of the agreement have been met. It is mostly used in instances where the parties are not known to each other and are separated by distance. It ensures that the person supplying goods or services will receive the payment.

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