What is the primary purpose of a documentary credit?

What is the primary purpose of a documentary credit?

• A. To insure goods during transit.
• B. To facilitate an outright cash sale.
• C. To issue a loan to the importer.
• D. To guarantee payment to the exporter provided the terms are satisfied.

Answer: (D)

A documentary credit is a bank’s promise to pay the exporter once the exporter presents the required documents that prove shipment and compliance with the credit’s terms. This arrangement guarantees payment to the exporter provided the documents are in order, even if the importer later defaults, while giving the importer time to arrange funds. It shifts payment risk from exporter to the bank and ensures payment only when the terms are satisfied. It is not about insuring goods, nor a cash sale, nor a loan to the importer.

A documentary credit is a bank’s promise to pay the exporter once the exporter presents the required documents that prove shipment and compliance with the credit’s terms. This arrangement guarantees payment to the exporter provided the documents are in order, even if the importer later defaults, while giving the importer time to arrange funds. It shifts payment risk from exporter to the bank and ensures payment only when the terms are satisfied. It is not about insuring goods, nor a cash sale, nor a loan to the importer.