Logistics, Trade Administration and Supply Chain

As indicated below, the seller may receive payment in advance or ship the goods on the mare promise of the buyer to pay either at the time of delivery or at a certain future date after delivery of the goods. To ensure a better arrangement of payment, the seller may request the buyer to make payment through a documentary credit. A documentary credit also known as a letter of credit or L/C, is an undertaking in writing given by the buyer's bank in which the buyer's bank guarantees payment to the beneficiary seller on condition that the beneficiary seller presents the stipulated documents and strictly complies with the terms and conditions mentioned in the documentary credit. We will discuss in greater details on the advantages and disadvantages of a documentary credit, how its works and the various types of documentary credit in the next chapter.

Perry's Dictionary of Banking defines a "collection as the receipt, transmission and presentation of a bill, draft, cheque or other instruments by a collecting banker for a customer and the subsequent direction of the resulting funds into the customer's account. Under this arrangement, the seller ships the goods to the buyer, engages the services of his bank to collect the proceeds from the said buyer. There are two methods of collection viz the clean collection and the documentary collection. In a clean collection, the seller ships the goods directly to the buyer. At the same time, the shipping documents are also dispatched directly to the buyer, to enable him to take delivery of the goods. The seller then draws a bill of exchange on the buyer requesting his bank to present the bill of exchange to the buyer for payment. In documentary collection, the seller ships the goods to the buyer and at the same time, he draws a bill of exchange on the buyer. The seller then hands t