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Advantages and disadvantages

The main advantages and disadvantages of a documentary credit are summarised in the following table.

ADVANTAGES It assures that the goods are sent prior to making payment. It guarantees payment collection upon presentation of the correct documents.
It offers solvency. It offers a finance option.
It can be used by the importer to negotiate on price, since payment collection is guaranteed for the exporter. Access to new markets, which businesses might not enter without a guarantee of payment collection.
DISADVANTAGES Banks and financial entities do not check goods, and payment must be made upon the presentation of correct documents. As the most complete means of payment/collection, monitored exhaustively by banks, it also charges among the highest fees.
The Bank must approve operation risk in order to issue the documentary credit. More complex means of payment collection: difficulty drawing up the required documentation.

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