export documents...letter of credit...bill of exchange....bill of lading
• A function of international trade whereby
goods and services produced in one country
are sold to another country
• The sale of such goods will add to producing
nations gross output.
• Exports are one of the oldest forms of
economic transfer, and occur on a large scale
between nations that have fewer restrictions
on trade, such as tariffs or subsidies.
• International trade (i.e. between and importer and exporter)
must work around a fundamental dilemma:
– They live far apart
– They speak different languages
– They operate in different political environments
– They have different culture
– Difficulty in tracking down in case of default
• In essence, there could be distrust, and clearly the importer
and exporter would prefer two different arrangements for
• The fundamental dilemma of being unwilling
to trust a stranger in a foreign land is solved
by using a highly respected bank as an
• a letter of credit (a bank’s promise to pay) on
behalf of the importer.
• Two other significant documents are an order
bill of lading and a sight draft.
Benefits of the system
• The system (including the three documents
discussed) has been developed and modified
over centuries to protect both importer and
– The risk of noncompletion
– Foreign exchange risk
– To provide a means of financing
LETTER OF CREDIT
• Issued by a bank at the request of the
• Bank pays a specified sum to a beneficiary,
normally the exporter, on presentation of
particular, specified documents
• Fee paid by importer for letter of credit
• May reduce borrowing ability of importer
since the letter is a financial liability
• Commercial letters of credit are also classified:
– Irrevocable versus revocable
– Usance versus sight
• The primary advantage of an L/C is that it reduces risk – the
exporter can sell against a bank’s promise to pay rather than
against the promise of a commercial firm.
• The major advantage of an L/C to an importer is that the
importer need not pay out funds until the documents have
arrived at the bank that issued the L/C and after all conditions
stated in the credit have been fulfilled.
• A draft, sometimes called a bill of exchange (B/E),
is the instrument normally used in international
commerce to effect payment.
• A draft is simply an order written by an exporter
(seller) instructing an importer (buyer) or its agent
to pay a specified amount of money at a specified
• Required before the buyer can obtain
• The person or business initiating the draft is
known as the maker, drawer, or originator.
• Normally this is the exporter who sells and ships
BILL OF LADING
• The third key document for financing
international trade is the bill of lading or B/L.
• The bill of lading is issued to the exporter by a
common carrier transporting the
• It serves three purposes: a receipt, a contract,
and a document of title.
• Bills of lading are either straight or to order.