Lecture 8 Terms of Payment

I introduction II methods of payment III exchange the ideas of payments IV instruments of payment V samples

I introduction The Significance The Reasons for the Features (complicated & difficult)

The Significance In international trade payment is often complicated. It plays an important role in the procession of trade. All activities will mean nothing without guarantee of payment.

The Reasons for the Features complicated & difficult) long distance and more procedures are involved long time is needed in settling payments

different regulations and systems of law that are applied further complicate the arrangement the monetary and financial matters are different in not the same countries and various methods are used.

II methods of payment 1.Remittance 2.Collection 3.L/C

1.remittance types of remittance the procedures the situations

types of remittance ★Mail Transfer (M/T) ★Telegraphic transfer (T/T) ★Demand Draft (D/D)

the procedures When remittance is adopted in international trade, the buyer will on his own initiative remits money to the seller through a bank according to the terms and time stipulated in the contract.

the situations Remittance is often used in payment in advance, cash with order and open account. Therefore, either the exporter or the importer takes risk in remittance. Usually it is used between companies that are trustworthy to each other in former transactions. When the exporter is widening his market, remittance can be used as a kind of preferential treatment offered to the importers.

2.Collection types of collection the procedures the situations

types of collection Documents against payment (D/P) Documents against acceptance (D/A)

Documents against payment (D/P) D/P calls for actual payment against shipping document.

According to the time of making payment, D/P can be divided mainly into two kinds A. D/P at sight: B. D/P after sight:

D/P at sight: It requires immediate payment by the importer to get hold of documents.

D/P after sight: the importer is given a certain period to make payment at 30,45, or 60 days after presentation of the documents, but he is not allowed to get hold of the documents until he pays.

Documents against acceptance (D/A) D/A calls for delivery of documents against acceptance of the draft drawn by the exporter. D/A is always after sight

the procedures in collection, payment is made through banks under the terms of D/P or D/A. the seller issues a draft, to which the shipping documents are attached, forwards the draft to a bank in his place (i.e. the remitting bank), makes an application for collection and entrusts the remitting bank to collect the purchase price from the buyer through its correspondent bank (i.e. the collecting bank)

the situations Payment by collection can be used, when the exporter and importer know each other well, or when the sum in question is small. It also spares the expenses and the complicated procedures of using a L/C. however, there is obviously a risk involved in collection, which is actually payment after shipping. In this case, the bank will only do the service of collecting and remitting and will not be liable for non—payment of the importer.

NOTE: payment by collection is not always safe, esp. by D/A NOTE: payment by collection is not always safe, esp. by D/A. on the other hand, the importer also runs the risk of inconformity of goods to the contract and documents.

L/C L/C is a reliable and safe method of payment and facilitates trade with unknown buyers and gives protection to both sellers and buyers.

III exchange the ideas of payments

IV instruments of payment In the international trade, payment can be made by various means: draft, promissory notes, check, money orders, credit card and cash, etc. . Cash and credit card are rarely used for large transactions. However drafts have been used as the most common instrument of payment in international trade, although promissory note and checks are sometimes used.

the common instruments/documents of payment Draft/ Bill of Exchange Promissory Note Check

1.Draft/ Bill of Exchange The introduction The contents The types

Introduction A draft or bill of exchange is an unconditional written order signed by one party(drawer) requiring a second party(drawee/ payer) to make payment in lawful money immediately or at the determinable future time to the third party(payee). In the context of international trade, the drawer/ payee is usually the seller and the drawee/ payer is usually the buyer.

A draft is a negotiable money instrument, which means that the ownership of the draft may easily be transferred form one person to another in exchange for value only when the endorsement is made and only then is the transferee considered the new owner.

the contents of draft Date and place of issue; Time of payment; Name of payee; Currency and amount Credit reference Name of drawee / payer Drawer’s name and signature

Note The forms of draft might be different, but the contents are basically the same

The types of Drafts banker’ s draft and commercial draft clean draft and documentary draft sight draft and time draft

banker’ s draft and commercial draft A banker’s draft is drawn by one bank (the drawer) on another bank (the drawee) with which it normally maintains a correspondent relationship. It is used in settling payment obligations between banks.

A commercial draft, the most commonly used instrument in world trade, is one that is drawn by a firm or an exporter. The drawee can be a firm, an individual or a bank.

clean draft and documentary draft A clean draft is one that is paid without the presentation of any other documents attached. A banker’s draft is usually clean.

A documentary draft is the one that can be paid only when certain other documents have been attached to and presented together with the draft. Commercial drafts are usually documentary. The most important document is bill of lading that represents the title to the goods.

sight draft and time draft A sight draft is the one that is payable at/ on sight upon its presentation. The drawee should immediately pay the amount on the draft drawn on him.

A time draft(usance draft/ term draft) is the one that is payable in a specified number of days after sight, or the date of issue or acceptance, or at a fixed future time. The specified number of days is called the “usance period”

Note: The above—mentioned types of draft are not mutually exclusive. For instance, one draft can be documentary, commercial, and usance at the same time.

Promissory Note The promissory note is the simplest kind of negotiable money paper. It is an unconditional promise in writing made by one person(the maker) to another( the payee/ the holder) signed by the maker engaging to pay on demand or at a fixed or determinable time a certain amount of money to or to the order of a specified person or to bearer. A promissory note is, therefore, a two—party paper where the issuer(maker) promises to pay a second person.

A promissory note can be issued by a person, a firm, or a bank A promissory note can be issued by a person, a firm, or a bank. Compared with commercial promissory note issued by an individual or a firm, promissory note issued by a bank is more widely used in trade today.

Check A check is an unconditional order in writing addressed by the customer(drawer) to a bank (drawee) signed by the customer authorizing the bank to pay on demanding a specified sum of money to or to the order of a named person or to bearer (payee).

A check is a special kind of draft in that the drawee is always a bank with which the drawer has an account. Besides, a check is always paid upon presentation. If the drawer wants to write a check now but does not want the payee to collect the money immediately, the drawer can postdate the check.

A check can be made to order, to bearer, crossed with two parallel lines for account deposit only, or certified by a bank that is going to pay. If a check is issued by a bank , it is called a banker’s demand draft. When the drawer signs the check, he should see to it that his deposit in the bank is not lower than the amount of the check. If the drawer has not enough deposit in the bank(drawee) for the check amount, the check will be dishonored, and this kind of check is called a bounced check, which is not allowed.