MCMukul Chopra

Trade Finance

The rules behind international trade

Notes from the desk: how documentary credits really work, what examiners look for, and where presentations go wrong. Pick a rule set to start.

Which instrument fits?

A quick comparison of the four main ways banks support trade.

Documentary creditDocumentary collectionDemand guaranteeStandby credit
RulesUCP 600URC 522URDG 758ISP98 or UCP 600
Bank promises to pay?YesNoYes, on demandYes, on demand
Banks examine documents?Yes, in detailOnly that they are as listedYes, the demandYes, the demand
Main rolePaymentPaymentSecuritySecurity, sometimes payment
Risk for the sellerLowHigher: buyer may not payProtects the beneficiary if the other party fails to perform
CostHigherLowerVariesVaries

Documentary credit

Rules
UCP 600
Bank promises to pay?
Yes
Banks examine documents?
Yes, in detail
Main role
Payment
Risk for the seller
Low
Cost
Higher

Documentary collection

Rules
URC 522
Bank promises to pay?
No
Banks examine documents?
Only that they are as listed
Main role
Payment
Risk for the seller
Higher: buyer may not pay
Cost
Lower

Demand guarantee

Rules
URDG 758
Bank promises to pay?
Yes, on demand
Banks examine documents?
Yes, the demand
Main role
Security
Effect
Protects the beneficiary if the other party fails to perform
Cost
Varies

Standby credit

Rules
ISP98 or UCP 600
Bank promises to pay?
Yes, on demand
Banks examine documents?
Yes, the demand
Main role
Security, sometimes payment
Effect
Protects the beneficiary if the other party fails to perform
Cost
Varies