11 Pages

Bankers’ commercial credits

Commercial credits are much used in international trade. Suppose B in Britain wishes to buy goods from S in Japan. B doesn’t wish to pay for the goods in advance of shipment, since something may go wrong whereby S fails to ship the goods. On the other hand, S doesn’t want to ship the goods without being sure of securing payment. A solution which will satisfy both sides is the banker’s commercial credit. What happens is that the seller puts a clause in the contract of sale requiring B to open a credit in S’s favour at B’s bank. The credit is to be payable to S when S presents the shipping documents to the bank. S will usually require the credit to remain irrevocable for a particular period of time. B agrees with his bank to do this. The bank notifies S that it has opened an irrevocable credit in his favour which he can draw upon as soon as he presents the shipping documents to the bank. In this way, S is assured of his money.