TERMS OF PAYMENT Payment in foreign trade may be made in cash and on credit. There are different methods of cash payment: 1. By cheque (but it is not practicable as a cheque is payable in the country of origin and its’ use is time-wasting to say the least. That’s why cheques are mostly used for payment in home trade.) 2. By telegraphic or telex transfers or post (mail) remittance which is made from the
Buyers’ bank account to the Sellers’ in accordance with the Buyers’ letter of instruction. Actually this method of cash payment may sometimes take several months, which is naturally very disadvantageous to the Sellers. The transfer is carried out at current rates of exchange. 3. By letter of credit (or just by credit) – L/C – (In our commercial practice the following types
of letters of credit are usually used: irrevocable, confirmed and revolving. An irrevocable L/C is one which can neither be modified nor cancelled without the consent- of the party in whose favour it has been opened. A confirmed L/C is an irrevocable L/C, payment under which is guaranteed by a first class bank in case the opener of the L/C (i.e. the Buyers) or the bank effecting payment defaults, or is unable to make payment.
A revolving L/C is one under which its value is constantly made up to a given limit after payment for each shipment, which saves the charges on multiple letters of credit.) The Letter of Credit is the most frequently used method of cash payment because it is advantageous and secure both to the Exporter and to the Importer though it is more expensive than payment by transfer. It overcomes the gap between delivery and payment arid gives protection to the
Sellers by making the money available for them on the fulfilment of the transaction and to the Buyers because they know that payment will only be made against shipping documents ‘ giving them the title for the goods. This method of payment is often used in dealings with developing countries. 4. For collection (Payment for collection does not give any advantages to the Exporter because it does not give any guarantee that he will receive payment in time or at all.
That’s why the Exporter usually requires that the Importer presents a guarantee of a first Class bank that payment will be effected in due time. Also, there is a long period of time between the delivery of the goods and actual payment. But it is advantageous to the Importer because there is no need to withdraw from circulation big sums of money before actually receiving the goods). Payment for collection against documents (with subsequent
ac¬ceptance or very often telegraphic collection .with subsequent acceptance) is mostly used in trade with East European countries. The costs involved in effecting payment for collection are twice or three times lower than those by letter of credit. Most modern business is done on a credit basis which may be: 1) by drafts (by Bills of Exchange – B/E) – the Exporter credits the Importer which is advantageous to the latter.
A draft (a bill of exchange) is an order in writing from a Creditor to a Debtor to pay on demand or on a named date a certain sum of money to a company named on the Bill, or to their order. It is drawn by the Sellers on the Buyers and is sent through a bank to the Buyers for acceptance (i.e. for acknowledging the debt). The draft becomes legally binding when signed and dated by the
Buyers on its face (front) and is to be met when due, i.e. 30, 60 or 90 days after presentation. The draft, may be negotiable, i.e. it may be used by the Sellers to pay their own debts, but in this case the Sellers are to endorse it by signing it on its back, then they can pass it on to the new holders. If the exporter wants immediate payment, he can discount the draft in return for a cash advance with
a bank for a commission, i.e. sell it to a bank for its face value less interest, and by supplying a document (a letter of hypothecation) giving the bank the legal right to claim the goods if necessary. Besides, he may leave it with a bank as security for a loan. All this makes the Draft a very practical method of payment in foreign trade. To sum up its advantages one should say that it simplifies the financing of export and import foreign
trade and cuts down innumerable movements of currency. There may be two main types of drafts: Sights Drafts, which are payable on presentation (at sight) or on acceptance and Term Drafts, which are drawn at various periods (terms) and are payable at a future date and not immediately they are accepted. Term drafts may pass through several hands before maturity and require endorsement by the Sellers. 2) in advance (the
Importer credits the Exporter, for example, the contract may stipulate a 10 or 15 % advance payment, which is advantageous to the Sellers). This method is used when the Buyers are unknown to the Sellers or in the case of a single isolated transaction or as part of combination of methods in a large-scale (transaction) contract. 3) on an open account. Open account terms are usually granted by the
Sellers to the regular Buyers or customers in whom the Sellers have complete confidence, but sometimes they are granted when the Sellers want to attract new Buyers then they risk their money for that end. Actual payment is made monthly, quarterly or annually as agreed upon. This method is disadvantageous to the Exporter, but may be good to gain new markets. .
The two methods of payment (in cash and on credit) are very often combined in a contract. Drafts, for example, may be presented under a letter of Credit and there may be other, sometimes very complicated combinations of various methods of payment stipulated in a contract. The form of payment to be used, i.e. in dollars, pounds sterling or other currency, is a matter for arrangement between the counterparts.
Exchange (drafts) and Promissory Notes. A bill of exchange is a signed document, such as a cheque, that orders a person or an organisation, such as a bank, to pay a fixed sum of money on demand or on a certain date to the person specified. It is a document that can be exchanged for goods, money, i.e. it is a negotiable instrument like cheques or banknotes and can be a subject of the deal. There are various types of bills of exchange: • accommodation
B/E: a bill that is signed by someone who promises to pay it to help another person to raise money. A person signing the accommodation bill is called the accommodation party, i.e. a person with a good financial reputation who signs a bill to make it easier to exchange; sometimes accommodation bills are called “kites”, “windbills” or “windmills”. • discounted B/E: a bill bought at a reduced price before it is due for payment; • documentary
B/E: a bill attached to shipping documents such as bills of lading, invoices, etc.; • documents-against-acceptance B/E [D/A, D/A bill]: a bill sent by an exporter with other shipping documents to an agent who will not release the documents until the bill of exchange has been signed (accepted) by the person receiving the goods; this is used when the bill of exchange is a period bill and must be paid by a specified date; documents-against-payments B/E [cash-against-documents]: a bill sent by an exporter with other
shipping documents to an agent who will not release the documents until the bill has been signed (accepted) by the person receiving the goods; this is used when the bill of exchange is a sight bill and must be paid immediately; endorsed B/E: bill signed on the back, that makes it payable to someone else; foreign B/E; a bill that is drawn or payable in another country; inland B/E: a bill that is payable in the country in which it is drawn up; period / term
B/E; a bill that must be paid on a specific date; • short B/E: a bill that must be paid as soon as it is presented for payment or within-ten days; • sight B/E: a bill that must be paid immediately as it is presented for payment; time B/E: a bill that is to be paid a certain number of days after being drawn or after being presented; trade B/E: a bill that is used to pay for goods. In terms of time of payment there are different conditions
on which the bills of exchange can be drawn up: • on demand: a bill of exchange must be paid immediately as it is presented for payment; • at sight: an inscription made by a drawer on a bill of exchange to show that it must be paid as soon as it is presented for payment; • after sight: an inscription made by a drawer on a bill of exchange to show that the bill would be paid within a specified time after the payer (the drawee) is presented with it; • after date: an inscription made by a drawer on a bill
of exchange to show that payment will be made at a specified time after the date given on the bill; such bills are called after-date bills. The drawer is a person who writes a cheque / a bank order / a bill of exchange, etc. and therefore instructs a drawee to make a payment within a stipulated period of time. The drawee is a person on whom. a cheque / a bank order / a bill of exchange have been drawn up, the payer. The drawee must accept the cheque / bill / bank order and pay it within the stipulated
period of time. Special attention needs to be drawn to the endorsement of bills ofexchange. Endorsement is a signature on the back of a bill of exchange or cheque by the payee (beneficiary), making it payable to another person. There are various types of endorsements used in business transactions: • accommodation endorsement: the name and signature written on the back of an accepted bill of exchange as a guarantee that payment will be made on the date given; • blank endorsement: a signature on a bill
of exchange or cheque, by the payee, making it payable to any other person, i.e. to a bearer; • restrictive endorsement: a signature on a bill of exchange or cheque, by the payee, making it payable only to a named person or account; it is no longer a negotiable instrument; • special endorsement: a signature on a bill of exchange or cheque, by the payee, making it payable to another person, i.e. to order; Another term of payment on credit is a Promissory
Note is a document in which a person or an organisation, such as a bank, promises (on behalf of the buyer) to pay affixed sum of money on demand or by a certain date, to the person specified (the seller). The most popular term of payment in cash is by letter of credit (L/C). A letter of credit is a letter from one bank to another bank, by which a third party, usually a customer, is able to obtain money. Here are some types of letters of credit: • circular
L/C: a letter of credit which is addressed to all branches, correspondents and agents of the issuing bank as opposed to a direct L/C; • confirmed L/C: a letter of credit to which the paying bank has added its guarantee that payment will be made against presentation of certain documents; • direct L/C: a letter of credit which the issuing bank addresses to one particular branch as opposed to a circular L/C; • documentary L/C: a letter of credit to which a number of other documents such as a bill of lading,
an insurance certificate, etc. have been joined by the exporter to obtain payment from the bank; • irrevocable L/C: a letter of credit that can only be cancelled with the agreement of the person expecting payment; • limited L/C: a circular letter of credit which can only be used in a certain number of places; traveller’s L/C: a document issued by a bank to a traveller whereby the traveller may receive money up to a stated amount from all the bank’s agents abroad, when the traveller’s letter of credit is used
up it should be sent back to the issuing bank. • unconfirmed L/C; a letter of credit which the issuing bank gives no promise that it will accept bills drawn upon it Thus, a confirmed irrevocable letter of credit guarantees the payment, for the goods being exported. Besides, all letters of credit can be valid within a stipulated period of time, after the expiry of which the payments can be made only with the consent of the parties concerned.
A letter of credit is safe business transactions as it provides for the payment to be effected only against shipping documents: Invoice, original Bill of Lading, a copy of a Waybill, shipping specification, packing sheet, Certificate of Quality, Certificate of Origin, Insurance Policy/Certificate. 1. post remittance: a sum of money sent from one person or place to another;
2. cable transfers: a relatively quick way of sending money to someone abroad; the sender’s bank cables the money (i.e. sends an instruction by telegraph for it to be paid) to the bank of the receiver; the money should be paid in the receiver’s currency at the current rate of exchange; the sum of money can either be credited to the receiver’s account or paid in cash against the identification. 3. by cheque: a special printed form is filled in and signed by a person, the drawer of a cheque asking
the bank, the drawee, to pay a sum of money to someone, the payee; there are different kinds of cheques used; • blank cheque: a cheque that is signed but without the amount of money written in; this is added later by the person to whom the cheque is paid when the amount is known; • certified cheque: a cheque marked by the bank it. is drawn on as `Good for payment`, meaning that a cheque is true and genuine; • crossed cheque: a cheque that has two lines drawn across it to show that it can only be paid into
a bank account and not exchanged for cash; • open cheque: a cheque that does not have two lines drawn across it and can therefore be exchanged for cash at the bank where it was issued; stale cheque: a cheque that is not presented to a bank for payment within six months of being written; it will hot be exchanged for money by the bank and will be returned, marked out of date’; • stopped cheque: a cheque that the person who signed it has asked a bank not to pay; if such a cheque is paid, the bank must bear the loss;
• traveller’s cheque: a cheque for a fixed amount, sold by a bank, that can easily be cashed in foreign countries.