A more thorough explanation:

A documentary credit is a type of financing arrangement that helps facilitate international transactions. It involves a financial institution authorizing or making a payment to a third party, usually an exporter, at the request of a customer. This allows the importer to obtain necessary credit and the exporter to receive an expedited cash payment.

Example 1: A company in the United States wants to purchase goods from a supplier in China. The supplier requires payment upfront before shipping the goods. The U.S. company does not want to risk sending payment without receiving the goods first. To solve this problem, the U.S. company can use a documentary credit. The U.S. company's bank will issue a letter of credit to the Chinese supplier's bank, guaranteeing payment upon receipt of the required shipping documents. Once the Chinese supplier ships the goods and provides the necessary documents, the U.S. company's bank will release the payment to the Chinese supplier.

Example 2: An exporter in Germany wants to sell goods to a customer in Brazil. The Brazilian customer does not have the necessary funds to pay for the goods upfront. To facilitate the transaction, the German exporter can request a documentary credit from the Brazilian customer's bank. The Brazilian bank will issue a letter of credit to the German exporter's bank, guaranteeing payment upon receipt of the required shipping documents. Once the German exporter ships the goods and provides the necessary documents, the Brazilian bank will release the payment to the German exporter.

These examples illustrate how a documentary credit can help mitigate the risks involved in international transactions. By using a documentary credit, both the importer and exporter can have peace of mind knowing that payment will be made once the necessary documents are provided.