When banks handle documents in order to obtain acceptance and/or payment, following the instructions given to them, this is called «collection». The exporter presents to his bank an application form with the documents attached. This bank makes out a collection order and passes it over to its correspondent bank in the country of the importer. The correspondent bank or some other bank may present the documents to the importer or pass them over to another collecting bank. This presenting bank presents the documents to the importer. Collecting banks do not take responsibility for acceptance or payment. There exist two types of collections. Collections may be documentary or clean. The documentary collection is the collection of commercial documents or the collection of financial documents together with commercial documents. The collection of only financial documents is called clean. Commercial documents are: invoices, bills of lading, waybills and certificates. Financial documents are: bills of exchange, promissory notes, cheques and payment receipts.
Documentary letter of credit
When a buyer in one country wants to pay a seller abroad he asks his bank to «issue» or to «open» a letter of credit. It means that the buyer's bank issues a documentary letter of credit. It is an agreement with banks, made by a buyer, provided certain conditions are fulfilled. The issuing bank asks its correspondent bank — usually in the seller's country — to advise and confirm the credit. The advising bank informs the seller that the credit has been opened. As soon as the seller receives the credit, he checks it and if he can meet its requirements, the seller ships the goods. At the same time the seller sends the documents which prove shipment of the goods to the bank where the credit is available. The bank checks the documents against the credit. If the documents comply with the requirements of the credit, then the nominated bank will make payment. The bank which made payment to the seller sends the documents to the issuing bank for reimbursement. The issuing bank after checking the documents reimburses the bank that has paid. The documents are then released to the buyer against payment. There are many types of documentary credits. A revocable credit can be amended or cancelled at any time without prior warning or notification to the seller. An irrevocable credit can be amended or cancelled only with the agreement of all parties thereto. As there are often two banks involved, the issuing bank and the advising bank, the buyer can ask for an irrevocable credit to be confirmed by the advising bank. If the advising bank agrees, the credit becomes a confirmed credit.
Credit is a term used to denote transactions involving the transfer of money or other property on promise of repayment, usually at a fixed future date. The transferor thereby becomes a creditor, and the transferee becomes a debtor. Hence, credit and debt are simply terms describing the same operation viewed from opposite sides.
Types of Credit
The principal classes of credit are the following:
commercial credit, which merchants extend to one another to finance production and distribution of goods. investment credit, used by business firms to finance the acquisition of plant and equipment and represented by corporate bonds, long-term notes, and other proofs of indebtedness. bank credit, consisting of the deposits, loans, and discounts of depository institutions. consumer or personal credit, which comprises advances made to individuals to enable them to meet expenses or to purchase, on a deferred - payment basis, goods or service for personal consumption. real-estate credit, composed of loans secured by land and buildings. public or government credit, represented by the bond issues of national governments. international credit, which is extended to particular governments by other governments, by the nationals of foreign...