Letters of credit (l/c) and cash against documents (documentary collections, cad) are the most frequently used payment methods in international trade. Their combined share is more than 50% in all trade finance practices. Letters of credit and cash against documents have some similarities. We can distinguish some common points of these two payment methods as follows : Both payment methods are executed by banks, documents play a key role, they are governed by internationally accepted rules etc. Despite these similarities they have some differences as well. On this article I would like to identify the main differences between Letters of credit (l/c) and cash against documents (documentary collections, cad).
What are the main differences between cash against documents vs letters of credit?
Let us examine the differences between these two important payment methods of international trade article by article below.
Governing Rules : Letters of credit transactions are governed by UCP 600 and cash against documents are governed by URC 522 rules. You can get detailed information regarding these two set of rules by reading my articles.
Transaction Flow : Letters of credit are opened by the issuing banks with the request and authorization which they have received from the applicants. Applicant is the importer in a commercial letter of credit. As a result letters of credit are initiated by the importers. On the other hand, cash against documents or documentary collections as we called them in trade finance are initiated by the exporters.
Risk Degree : Letters of credit give more assurance to the exporters than cash against documents for this reason letters of credit accepted as a more secure payment methods in international trade than documentary collections.
Responsibilities of Banks : Banks play a key role in letters of credit transactions and they have high levels of responsibilities against exporters. On the other hand in documentary collections banks have almost no valid responsibilities against exporters. As an example banks do not control the documents in documentary collections but in documentary credit transactions banks check the documents to determine whether the presentation is complying or not.
Complexity : Documentary collections are much more easy in operational perspective than documentary credits.