Assured of quantity and quality if goods are inspected before shipment. For exporters this is referred to as an import documentary collection. For importers it is an import documentary collection. It is used when an exporter and importer know each other well and have a history of successful business transactions. It is more secure than shipping on an open account and less secure that using a letter of credit.
Collections are generally less costly than letters of credit.
Commercial letters of credit are one of the most commonly used methods of payment in international trade. Once the documentary requirements cited in the letter of credit have beenmet, the seller relies on the bank for payment. The buyer, in turn, is assured that funds will not be released untile the terms of the letter of credit have been met. These are generally used when trading partners are not familiar with each other, when the contract size is large, or when there is substantial economic or political risk. The issuing bank is substituting its credit for that of the buyer.