Types of payment methods in international transactions based on documentary credit method
Types of payment methods in international transactions based on documentary credit method

خانه Types of payment methods in international transactions based on documentary credit method

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Types of payment methods in international transactions based on documentary credit method

Types of payment methods in international transactions based on documentary credit method

The need for global exchange began in the 18th century with the advent of Adam Smith’s theory. The views of other scientists through Ricardo, Heckcher, Ohlin and… The need for businessmen to pay more attention to international transactions. They tried to meet the needs of their citizens by acquiring goods and services superior to other countries, but when This movement started, many problems were faced by traders and merchants, the most important of which are:

1- Lack of familiarity between traders and lack of trust between the parties to the transaction

2- Lack of familiarity of traders with the laws and rights of other countries

3. The actions of governments, which sometimes restrict exports and imports and sometimes impose heavy tariffs and impose problems by enforcing currency control regulations.

4- Fluctuations and changes in the exchange rate of common currencies between countries, especially since the introduction of the floating monetary system

5. Time and distance distance between countries that prolongs the exchange of goods.

6- Lack of understanding between traders on how to receive the goods and ensuring the receipt of real goods and how to pay for the goods.

These problems disrupted the process of international transactions, so based on the merchants’ knowledge of each other, different methods were considered to solve them. From the purchase of goods of foreign traders, the last method, namely documentary credits, has been accepted and approved by everyone, and the International Chamber of Commerce, in order to succeed and reform it, has created uniform regulations called UCP.

A variety of payment methods in international transactions.

A) Payment of the price of the goods in advance payment in advance

B) Payment in open account

C) Payment on a simple clean collection

D) Payment on documentary collection

F) Payment through documentary credit

A) Payment in advance of the goods (Payment in advance): In this case, the buyer of the goods provides the seller with all the money along with the order of the goods. This payment method may be appropriate if the following conditions are met:

1) The buyer has full confidence in the seller of the goods.

2) The regulations of the buyer country should allow the advance payment of the full amount of the goods.

3) The buyer has a good financial situation that can pay all the money before receiving the goods while not increasing the risk of the buyer’s operations

4) Buyers and sellers must ensure that the government does not impose restrictions on the export and import of goods or services.

In this sense, in this method, a lot of risk is placed on the buyer if the seller does not send the goods or his goods do not have the desired features and specifications during the transaction, many problems are created and the buyer suffers economic losses and … Be.

Note: The buyer can pay the seller for the purchased goods through various methods:

1) By international bank check

2) International remittance

3) By post or telex

4) via swift

Swift is an integrated system of commercial banks in which banks are connected to each other through their global network and with accounts that open with each other. Facilitate and expedite payments and receipts between each other and their customers. Thus, today, most of the merchants’ payments are made through this method, and at the same time, this network can provide the necessary documents for the parties to follow up, so that when a problem arises and the transaction becomes legal, they can use it to file a lawsuit.

B) Payment in open acc.: This method is exactly the opposite of the previous method in terms of risk and trust. Here, the seller sends the goods based on the agreement he has made with the buyer and sends his ownership Loses goods and shipping documents and gives them to the buyer. The buyer will pay according to the terms of the contract based on the agreement. In this case, the seller has full confidence in the buyer and the government does not impose restrictions on the export and import of goods. However, the risk of this transaction is on the seller who can export to you in order to reduce the risk or send the goods in part and after receiving the amount of the transported goods, re-export the rest of the goods.

C) Payment based on simple collections (clean collections): In order for the seller and buyer to be more confident in the transaction and the accuracy of the goods sent, the above two methods were not reliable, but if the buyer and seller based on each other’s sense of reputation Other traders, etc., have gained some trust in each other, as well as the conditions of the buyer country, which does not enact laws restricting the receipt of money for the goods sold. Merchants can do their transactions through your simple bill. For this purpose, the seller sends the goods and sends the shipping documents directly to the buyer, and with it, issues the bill to the buyer.

Definition of Barat: Barat is a written document according to which one party (Bratkesh) orders the other party (Bratkgir) to pay a certain amount to himself (Bratkash) or his own remittance. Barat is divided into two types in terms of time. : 1) A visit that must be paid for as soon as you see it (if the date is not stated on you, the buyer (buyer) is obliged to pay you after the visit. 2) Duration: which to pay you Gives you the opportunity to pay you within the specified time period, thus using the following benefits for merchants:

1) The seller, by issuing your receipt, to some extent ensures that he can receive the amount of your receipt (goods) from the buyer (receiver).

2) The issuer has the opportunity to sell you before maturity and finance itself.

3) The foreign buyer has the opportunity to sell the goods and pay for it with a delay in return for the long-term loan.

4) By paying you, the buyer keeps your carcass or sheet as a payment receipt and can defend himself in legal proceedings.

5) If the buyer has accepted your term and does not pay the due date or does not pay for your visit, the issuer can file a lawsuit in the court of the buyer’s country. It should be noted that all those who have accepted your term for a long time are obliged to pay you in case of a complaint.


However, in order to be more confident, the seller of the goods tries to send the goods through the method of sending documents.

D) Payment based on documents: In this case, the seller sends the documents through a bank, ie he asks his broker bank to send the documents with you to the broker bank in the buyer’s country, after receiving the documents by The bank should provide the buyer with the documents based on your type (visual – term). In this case, the buyer’s broker bank will deliver the documents to the buyer in front of you when he receives the money, and in return he will take a long-term endorsement and acceptance of the buyer and deliver the documents to him and at the due date Takes it and gives it to the seller’s broker bank. Therefore, in the case of documents, four parties are involved in the transaction.

1) Drawer seller, Exporter 2) Remitting bank

3) broker bank buyer collection bank 4) buyer Drawee / Importer

Of course, these banks are not responsible for the contents of the documents, etc., and only reduce the seller’s risk in receiving the goods. Of course, in some countries, the buyer’s broker bank puts its name on you next to the buyer, which indicates a guarantee of payment to you at maturity (this is called avalising bill) and increase the issuer’s guarantee. Gives. However, the letter of credit method has higher features and guarantees, which we will describe now.

F) Lending: Commercial risks in the above methods led traders to find a less risky way than to try the International Chamber of Commerce by streamlining the trends in letter of credit, which is much less risky. In other ways, it provided the same rules for transactions. These reduced risks and danger. Today, traders have traded their goods using the letter of credit method and have largely eliminated the risks of not knowing the laws of the country, the long time of exchange of goods and services, restrictive measures of governments, and so on. In this method, traders (importers / exporters) do not communicate directly with each other, but through their intermediaries, ie reputable commercial banks that have accepted the opening and notification of documentary credit, communicate with each other and exchange goods, and if the obligations And perform their professional duties in accordance with the text of the letter of credit will not bear the risk in the transaction. This method has the following benefits for the buyer and seller:

Buyer benefits Seller benefits


1) Provides the ability to verify that the exporter has complied with the loading conditions


1) If all the conditions stated in the text of the letter of credit are observed, there is no risk of not receiving the money for the goods sent to the seller.


2) Loading of goods should be done during a specific and short period of time



2) Payment is made by a bank in its own country


3) Goods are produced and sold with international standards and procedures and reasonable prices.


3) The ability to receive the goods after the load is created for the seller


4) Receiving a loan and credit from the bank for immediate payment of the credit to the seller


4) Receives professional advice through the bank. And …


5) Guided by the bank and receives professional advice


1) Buyer: The buyer or importer, after performing the necessary checks, selects the desired seller and conducts the initial negotiations and a trade agreement is formed between them, then the buyer with a pre-invoice (in Iran need to register Order in the Ministry of Commerce) refers to the issuing bank and requests the opening of documentary credit (L / C).

2- Opening bank: This bank is located in the buyer’s country and within the framework of the regulations of its country (in Iran, the central bank), if the seller fulfills his obligations, he will pay the transaction on behalf of the buyer.

3- Kagzar Bank: This bank is located in the seller’s country and is in fact the representative of the issuing bank. .

4- Seller: who undertakes to produce the goods mentioned in the credit at a specified time and send it to the buyer for use according to the documentary credit conditions.

The following individuals or groups may be in the credentials:

1- Document Trading Bank: This bank may be different from the notifying broker and only have a license to submit documents to the issuing bank. To have a seller.

2- Confirming bank: If the seller, based on the economic or political conditions of the buyer country, not knowing the conditions of the buyer or the bank opening the credit, requests that the approval of another bank that he trusts be added to the credit conditions and the opening bank. Accept this. A bank called the confirming bank will be added to the credit, which will have the obligation to pay the seller at the time of the exchange of documents or the maturity of the credit.

Execution steps in the letter of credit method:

A. Credit opening: First, there are contracts between the buyer and the seller for the exchange of goods (the subject of this contract has nothing to do with the text of the letter of credit and its terms and is only between the buyer and the seller) and then the seller’s invoice for the buyer. Is sent, the buyer goes to the issuing bank, in this bank the necessary obligations such as the obligation to pay foreign currency, collateral for inability to pay at maturity, etc. are taken from the buyer and the opening message is issued to the notifying bank, the bank The notifier also delivers the message to the seller.

The points mentioned in the text of the message of opening the documentary credit: These points are in order to expedite the exchange of goods and to clarify the duties of the parties to the exchange. ucp600 Match the text of the credentials.

1) Mention the name of the buyer of the goods and his address and details as well as the seller

2) The exact amount of credit and the type of currency involved

3) Credit maturity: which is the expiration date of L / C and after that the seller has no right to make a transaction.

4) Place of maturity: which is the last date for the seller to transport the goods and after that he has no right to produce the documents of the place of goods and in ucp600 this date is 21 days before the date of maturity.

5) Specify the type of credit

6) Specify how to pay credit

7) Description of the goods and the tariff number of the goods, as well as the amounts of the freight for the goods, the unit amount of the goods …

8) How to insure the goods, the basis of the contract and shipping based on Oncoterms …

9) Transportation from one device to another and ….

Note that all of the above are mentioned in the text l / c and the resulting costs are also specified who will be responsible, thus the risks and risks of the transaction are identified and if individuals comply. Those conditions can be easily exchanged.




Advising bank

Issuing bank




Euro P / I


(L / C Issued)



For L / C



B) Change of terms and corrections: At this stage, based on the message received and reviewing the terms, if necessary, the seller requests changes in the sent message, it should be noted that in the text of ucp600 it is mandatory that all corrections must be With the agreement of the buyer, the seller and the opening bank, and after notifying it, it is enforced by the banks.

C) Transaction of documents: At this stage, the seller prepares the goods and based on it, creates the transaction documents that are included in the terms and text of the credit. It should be noted that the most important documents are issued by the seller (trade list) of the carrier company (ship’s bill of lading or all types of waybills) chamber of commerce of the exporting country (certificate of origin indicating the authenticity of the goods), so if the goods comply with the text Credited and approved by the shipping company and the Chamber of Commerce, the buyer is fully assured of the authenticity of the goods.

I) Deposit and endorsement of documents: After creating the documents, the seller puts them in the possession of the notifying bank and the bank examines the documents and if the documents are correct, provides them to the opening bank. It should be noted that since the issuing bank has an irrevocable obligation to pay the credit amount by notifying the credit (Article 5 uep600) in the credit conditions, the bill of lading, which is the transfer of ownership of the goods, is issued in his name so that the buyer is obliged to Payment should be made to this bank, however, the opening bank also examines the documents and provides them to the buyer if they are correct and paid. At this stage, the opening bank receives the credit from the buyer and endorses the bill of lading and gives it to the buyer, and then pays the seller.


3 Payment


Advising bank

Issuing bank


2 Document

1 goods

Payment 3

Payment 3



2 Document

2 Document

Note: If the documents are inconsistent, the notifying bank can inform the seller and ask for its correction. However, if the seller requests to send the documents and the buyer accepts the discrepancies, payment will still be made and only the bank fees will be due to discrepancies. It will be deducted from the documents (usually € 40 or equivalent) and given to the seller.

F) Customs formalities and clearance of goods: The buyer can receive the goods during the customs formalities when the goods are delivered to the customs port or airport, with the goods documents in hand.

Types of letters of credit:

A: Letters of credit in terms of accrual can be divided into 3 general categories:

1) Reversible documentary credit

2) Non-refundable documentary credit

3) Valid irrevocable documentary credit

1) Reversible letter of credit: is a credit that at any time and without prior notice to the beneficiary, the foreign buyer can modify or cancel the credit by the bank that opened it. Therefore, it creates a lot of risk for the seller. Thus, this type of credit is not very common and is not discussed in uep600 anymore (this type of credit is subject to Article 8, ucp500 and has been removed in ucp600)

2) Non-refundable letter of credit: This type of credit guarantees the seller that the credit will not be modified or canceled without considering his opinion, in other words, for any correction or cancellation of the opinion of the L / C members (buyer, seller and bank). The issuer’s obligation is irrevocable, even if it sends the text of the credit in draft form.

3) Approved non-refundable letter of credit: In this case, the seller requests to receive more guarantees from the banks of his country. Credit in Iran is subject to the permission of the Central Bank and is usually opposed to the announcement of the approving bank because it indicates the weak economic-political situation and inadequate financial strength in the opening bank.

B) Types of documentary credits in terms of L / C payment period:

1) Visual documentary credit: In this type of credit, the seller, after sending the goods and presenting the shipping documents to the brokerage bank and ensuring the issuance of documents based on the credit conditions, submits the documents to the opening bank and requests to receive the credit. After reviewing the documents, the giver is obliged to pay to the seller, in this case, the buyer also provides the money to the issuing bank and by receiving the documents, he can receive the goods through customs.

2) Deferred documentary credit: In this case, an agreement has been reached between the buyer and the seller that the goods are exchanged and provided to the buyer, and then after a specified period of time specified in the credit conditions, the credit amount through the opening bank. To be given to the seller by the seller, it is obvious that the opening bank will also receive the required amount from the buyer at the due date.

3) Refanance documentary credit: In this type of credit, the broker bank (notifier) ​​trusts the buyer through the central bank of the buyer or other competent authorities that guarantee the efficiency and ability of the foreign buyer and provides the credit to him in the form of facilities. Provides that after the seller submits the documents, the notifying bank pays the seller and at the maturity that has already reached an agreement with the buyer, receives the original credit amount along with its interest and commissions from the buyer in a message to the bank The issuer announces the exact amount of interest, commission and principal credit so that the issuing bank receives and provides it to the buyer.


4) Usance documentary credit: In this case, the opening bank, based on the documents received from the buyer, provides facilities to him and after receiving the goods transaction documents, pays to the seller and at maturity along with the original amount of interest documents and other commissions. Will calculate and receive from the buyer.

C) Other divisions of letters of credit:

1) Transferable letter of credit: In this case, the seller has the right to transfer all or part of the amount of credit to another person or persons, this type of credit is created when the seller is not the main supplier of goods and is in fact the beneficiary of the credit The contract between the seller and the original supplier does not give the goods, the transferable credit can be transferred only once and it must be clearly stated in the l / c text that the credit is transferable. The text will also be valid for the second beneficiary. Documents issued by the second beneficiary can also be accepted in the transferable credit.

2) Back to back: Whenever a second letter of credit is issued by the seller’s bank based on the first credit and at the seller’s request, that credit is called a letter of credit, this happens when the first seller is able to Not to produce and deliver the goods, in which case a secondary credit opens exactly like the primary credit (albeit with a lesser expiration date and a lower amount) according to the first credit to obtain the goods through the second seller and make it available to the foreign buyer. Send.

Of course, it should be noted that transferable and reliable credits are less used due to the legal problems it creates for banks and merchants.

4) Revolving letter of credit: is a credit that allows the amount of credit or credit maturity without the need to open a new credit, so each time the documents are presented and withdrawn by the beneficiary, renewed again and up to the initial amount of credit, ie the beneficiary in this The type of credit can send goods and documents to the credit amount several times and the opening bank and the buyer are obliged to pay.

5) Letter of credit with red bond: It is a credit in which part of the transaction amount is paid before sending the goods to the seller, in cases where the seller needs financial resources to invest and produce custom goods and agrees with the buyer. This type of credit is used when it receives a percentage of the transaction amount before sending the goods, and it is called by this name because a red mark is placed on the text of the credit by the issuing bank.

Bank guarantees and its types:

These warranties may be provided by the buyer or seller. If the guarantee is provided by the buyer in order to give reassurance and create peace of mind to the seller, it means that by replacing the bank with the buyer, the seller is assured that if the price of the goods is not paid in the terms and time of the original contract Or not opening a letter of credit, the bank issuing the guarantee will be obliged to pay for the goods, usually the guarantees provided by the buyer are in the form of good performance. Guarantees issued by the seller in favor of the buyer to ensure the buyer does not deliver the goods or the delivery of defective goods and has 4 types, which are:

1) Guarantee of participation in the tender or auction

2) Advance payment guarantee

3) Guarantee of good performance of commitment or work

4) Warranty guarantee or refund of guarantee deposit

However, by issuing these guarantees to each of the parties to the contract, the banks reduced their risk and provided a payment obligation for themselves, which in case of non-fulfillment of the obligations of the guarantee applicant, they are obliged to provide damages to the beneficiary of the guarantee.

Author: persian / Date: 2017-10-26
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