“Please advise what is the difference between L/C and D/P payment ? Thanks in advance”.
A question received from Helen Jolee, China.
LC, as we all know, is a written undertaking by the issuing bank to guarantee that the payment will be honoured upon presentation of documents and in compliance with the terms and conditions of the LC.
The paying bank will notify the buyer and make presentation by obtaining payment for the documents value, that is switching documents for payment. The paying bank is also merely acting as and ‘agent’ to collect payment from the buyer and deliver the documents. If the buyer fails to pay on first presentation, the paying bank has no authority to demand neither can it enforce any legal mechanism to obtain payment from the buyer.
The ‘ownership’ of the documents under Collections is held by the seller. The seller is the party in this operations who makes a call. The paying bank only acts according to the instruction of the seller via instructions provided for by his bank (Collecting bank).
This method of trade settlement is much riskier as compare to LC. However, it is also widely used in international trade especially involving parties of the same group of companies. First time traders are not advised to resort to this method as the probability of non payment is very high.