What are the main differences between collection and letter of credit payment methods

In layman's terms, the main differences between collection and letter of credit payment methods are:

Collection belongs to commercial credit, that is, whether the payer (importer) pays depends on the creditworthiness of the payer, if the payer's creditworthiness is good, the payer will pay the redemption bill after the collection bank prompts the bill of exchange or documents, and if the payer's reputation is not good, the payer will not pay the redemption bill after the collection bank prompts the bill of exchange or documents - therefore, the collection of the collection payment method is not guaranteed.

The letter of credit belongs to bank credit, that is, as long as the beneficiary of the letter of credit submits the documents that meet the requirements of the letter of credit, the issuing bank guarantees payment to the beneficiary - therefore, the payment method of the letter of credit is guaranteed for the beneficiary - as long as the conditions or provisions of the letter of credit are met.

1. Different payment responsibilities: the bank is only responsible for sending the documents when collecting, and entrusts the collecting bank to collect (or accept) the documents, and is not responsible for whether the documents will be repaid. Under credit, as long as the exporter submits the documents in accordance with the agreement, the issuing bank (or the negotiating bank) is responsible for payment.

2. Different directions of opening: the collection shall be mailed by the exporter's bank to the bank at the place of import for collection. The L/C is issued by the importer's bank to the exporting bank, which then notifies the exporter to submit the documents.

3. Different costs: the handling fee of one thousandth of the collection is generally much less than that of the letter of credit.

4. Different application conditions: L/C generally requires a deposit or collateral, etc., while collection can be handled as long as the enterprise is in the directory, Class A and Class B are acceptable, and there is no need for a quasi-loan certificate.

5. No risk: For exports, collection is much more risky than L/C in terms of refusal by the importer.

The difference between a letter of credit and a collection is that a collection is based on commercial credit, whereas a letter of credit is based on bank credit.

The business process of a letter of credit is as follows:

1. The defendant of the import and export shall expressly stipulate in the sale and purchase agreement that the payment shall be made by letter of credit;

2. The importer shall clearly apply for the issuance of the letter to the bank of the city where it is located, fill in the application form for issuance, and ask the issuing bank to give the exporter a letter of credit according to a certain issuance deposit or other guarantees;

3. The issuing bank shall set up a L/C with the exporter as the beneficiary according to the content of the application, and notify the L/C to the exporter through its annunciating bank in the city where the exporter is located;

4. After the exporter arrives at the shipment of goods and obtains the transport bill specified in the letter of credit, he shall negotiate payment with the city bank where he is located (which can be the announcement bank or other banks) according to the requirements of the letter of credit;

5. After the negotiating bank negotiates the payment, the negotiated amount shall be indicated on the reverse side of the L/C.

The general procedure for payment by letter of credit is as follows:

1. The parties to the import and export shall clearly stipulate in the sales contract that payment shall be made by letter of credit;

2. The importer submits an application for issuance to the bank where it is located, fills in the application for issuance, pays a certain deposit for issuance or provides other guarantees, and asks the bank (issuing bank) to issue a letter of credit to the exporter;

3. The issuing bank shall issue a letter of credit with the exporter as the beneficiary according to the content of the application, and notify the exporter of the letter of credit through its ** bank or correspondent bank (collectively referred to as the advising bank) where the exporter is located;

4. After the exporter ships the goods and obtains the shipping documents required by the letter of credit, he shall negotiate the payment with the bank where he is located (which can be the advising bank or other banks) according to the provisions of the letter of credit;

5. After the negotiating bank negotiates the payment, it shall indicate the negotiated amount on the back of the letter of credit.

Collection is a commercial credit, and when the bank handles the collection business, it has no obligation to check whether the shipping documents are correct or complete, nor does it assume the responsibility that the payer must pay. Although the collection is handled through the bank, the bank only acts as the trustee of the exporter and does not bear the responsibility of payment, and the importer's non-payment has nothing to do with the bank. The exporter still relies on the importer's commercial credit to collect payment from the importer.

If the importer refuses to pay, the bank is not obliged to take custody of the goods, unless otherwise specified, and the exporter should still be concerned about the safety of the goods until the other party pays for the goods.

Literally, the point of money transfer is to pay, which is a form of payment. The point of collection is collection, which is a method of collection. A letter of credit is a promise to guarantee payment.

Both money transfers and receipts are intermediaries of banks, entrusting banks to make payments or receive payments. There are four basic aspects involved. In addition to the payer and payee, there are remitting and remitting banks, as well as collection banks and collection banks.

A letter of credit is a written document issued by a bank where the buyer and seller conditionally promise to pay to avoid risk.

Extended Materials: 1. Remittance

There are three main international payment methods, namely remittance, collection, and letter of credit. Remittance is a payment method in which the payer remits the payment to the payee through bank or other channels according to the agreed conditions and time. There are three types of remittance, namely mail transfer, wire transfer, and bill transfer.

2. Colletion

The collection method is a way in which the exporter issues a bill of exchange together with the shipping documents and entrusts the bank at the place of export to collect money from the importer through the collecting bank at the place of import.

1.For collection, Documents Against Payment (DP) can be divided into Documents Against Sight (DP Sight) and Documents Against Usance (DP After Sight); Documents Against Acceptance (d a).

2.The parties to the collection and the general procedures include: the consignor, the collecting bank, the collecting bank and the payer.

3.The general procedures of collection: fill in the collection form, submit it to the bank for collection, collect money from the collecting bank to the importer, pay the importer, transfer money from the collecting bank to the collecting bank, and collect the characteristics;

4.international practice of collection;

5.Problems that should be paid attention to when using collection payment methods. Once the importer refuses to pay, the exporter will have to take a lot of risk. Therefore, when using the collection method, strict attention should be paid to the business style and credit status of the importer.

3. Letter of credit.

A letter of credit is a document used by a bank to guarantee the buyer's or importer's ability to pay. In international ** activities, the buyer and the seller may not trust each other, and the buyer is worried that the seller will not deliver the goods according to the contract requirements after the advance payment; The seller is also concerned that the buyer will not pay after shipping the goods or submitting the shipping documents. Therefore, it is necessary for two banks to act as guarantors for both buyers and sellers, collect and submit documents on behalf of them, and replace commercial credit with bank credit.

The instrument used by banks in this activity is the letter of credit.

Collection is divided into two types: document against payment (dp) and document against acceptance (d a), the former is payment at sight, that is, the exporter ships the goods on time in accordance with the provisions of the contract, and according to the agreement on the documents in the contract, sends the documents to the bank where the importer is located (collecting bank) through the local bank (collecting bank), and entrusts the collecting bank to remind the importer of the documents and requires the importer to pay, and the importer delivers the payment to the collecting bank, and the collecting bank hands over the documents to the importer after the importer pays the payment to the collecting bank; The latter is the same procedure as the former, except that the importer only needs to make an acceptance on the bill of exchange as long as the collecting bank reminds it of the usance bill, and the collecting bank will immediately release the bill.

If the importer does not pay, the exporter has no guarantee of collection, and the risk of the document against acceptance (d a) is greater, that is, if the importer does not pay, the exporter has the risk of losing both money and goods.

The letter of credit (l c) is the credit of the bank, which is a written document of conditional payment commitment issued by the issuing bank to the beneficiary (exporter) according to the application of the issuing applicant (importer), that is, as long as the beneficiary acts in accordance with the provisions of the letter of credit and submits the documents that meet the provisions of the letter of credit, the issuing bank will guarantee payment to the beneficiary.

Therefore, the main difference between collection and letter of credit is that the former is commercial credit, and the latter is bank creditworthiness.

The fundamental difference between the two is that one is the commercial credit of both parties, while the letter of credit involves the credit of the bank.