Why is a Documentary Letter of Credit (DLC) a popular payment instrument for sugar and commodity buyers, yet not well accepted by sellers overseas?
DLCs are popular due to several reasons:
1) DLCs provide a high level of security for buyers as they ensure that payment will only be made once the seller has fulfilled all the conditions specified in the letter of credit. This reduces the risk of non-performance by the seller.
2) The DLC involves a bank guarantee which reassures companies of the credibility and financial stability of the transaction. The bank acts as an intermediary, ensuring that payment will be made once the terms of the contract are met.
3) Banks may offer more favorable terms for loans or credit when a DLC is involved because it reduces the risk associated with the transaction.
However, overseas sellers may not prefer, or accept DLCs for several reasons:
1) DLCs can be complex and involve significant paperwork and administrative tasks. The process can be time-consuming and costly, as banks charge fees for issuing, confirming, and amending DLCs.
2) DLCs can lead to payment delays since the seller must present all the required documents and meet all the terms and conditions specified in the DLC before payment is released. This can be particularly challenging if there are discrepancies in the documentation.
3) DLCs often come with stringent conditions and requirements, which can be difficult for sellers to meet precisely. Any discrepancy in the documents can lead to delays or non-payment.
4) If the issuing bank is not well-known or has a lower credit rating, sellers may be hesitant to accept a DLC due to concerns about the bank's ability to honor the payment.
5) Overseas sellers might prefer other payment instruments such as standby letters of credit (SBLC) which might be simpler and provide quicker access to funds.
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Ms-Banking- Management -Lending- Agricultural Sector CIB unit at Piraeus Bank in Athens Greece
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