1. Payment of Goods in International Trade
Teaching Objectives
By learning this unit, the students are supposed to be able to
Know the basic instruments and methods of payment in international trade
Write letters concerning international payment

2. Teaching focus
1. How to decide the appropriate method of payment in international trade.
2. How to write a letter talking about the method of payment.

3. Section 1 Instruments of Payment
Teaching Objectives:
By learning this section, the students are supposed to be able to
1. Know frequently used instruments of payment in international trade
2. Write letters introducing instruments of payment in international trade

4. What can be considered as the end of a successful business?
No export transaction can be said to be successful until payment has been received for the goods delivered overseas, and the proceeds have been safely credited to the exporter’s account. Compared with payment arrangements for domestic transactions, international payment arrangements are much more complicated and difficult. What we are going to talk about is going to be the following points:

5. There are different means of payment including draft (or bill of exchange), promissory note, check, credit card and cash, etc. Cash and credit card are rarely used for large transactions in international trade. The common instruments of international trade are draft, promissory note, and check, among which draft is the most frequently used one

6. Issuance means the act of the drawer in filling out the draft with particulars including the name of drawee (or payer), the payable amount, the date and place of payment and the name of the payee, etc. 
Presentation means that the holder of the draft presents the draft to the drawee (or payer) asking the latter either to pay or to accept the bill.
Acceptance means if a usance draft is presented; the drawee takes up his responsibility by accepting the draft for payment at a fixed future date through putting the word “accepted”, his signature and the date of acceptance on the face of the draft.

7. 4. Endorsement serves to transfer the title of a draft to the transferee. 
5. Discount: If the holder of a usance draft wants to get money before payment, the draft can be discounted through a discounting bank at the prevailing discount rate. 
6. Dishonor: When a draft is duly presented for acceptance or payment but the acceptance or payment is refused, the draft is said to be dishonored.

8. Sample analysis
Dear Sirs, We thank you very much for your order No. 727 of February 2 with which you have sent us your shipping instructions. The goods of your order are being manufactured for shipment. Kindly open an irrevocable L/C in our favor in time and we ask you to send it promptly. Upon arrival of the L/C we will pack and ship the goods immediately as requested in accordance with your shipping instructions. We assure you that we will make complete shipment so that we can give you perfect satisfaction. Yours faithfully,

9. Letter Structure Analysis
In the opening paragraph, it first expresses thanks and states clearly the order No, which enables the reader to get a general idea of what’s going on! Use the following sentence structures: 
I thank you very much for ··· 
We acknowledge ··· 
We appreciate ···

10. 2. Recommend a method of payment
2. Recommend a method of payment. Use the following sentence structures:
Would you please open ···？ 
Kindly please open a ···? 
I strongly recommend ··· as a method of payment 
The things that your business partner should pay attention to! 
Please note that ··· 
We hope that ··· 
Your cooperation on ··· is going to be appreciated!

11. Exercise
Translate the following sentences into Chinese: 
The drafts drawn under and in compliance with the terms of the L/C shall be honored on presentation and delivery of documents as specified. 
In order to save a lot of expenses on opening the letter of credit, we will remit you the full amount by T/T when the goods purchased by us are ready for shipment and the freight space is booked.

12. 3. Since it takes time to open the L/C while the goods under this order are urgently required to meet the season, may we suggest that you draw draft on us at sight through your bank and we will honor it on presentation?  4. We would like to invite your attention to the fact that the L/C covering your order No.546 has not reached us in spite of our repeated requests.

13. Assignment (Letter Background)
Your company placed an order No. 135 for wrist watches on October 10 and you have established with the National Bank the confirmed, irrevocable Letter of Credit No.6738 for the amount of FRF 62,000 payable by sight. Please write a letter to inform Accurate Watch Ltd. In your letter, you are expected to clarify that other related documents should be accompanied and explain why you need this to be done as soon as possible. Last, you are supposed to stress that no delay should occur and express you hope for an early reply.

14. A draft is an unconditional written order addressed by one person to another and signed by the person giving it, requiring the person to whom it is addressed to pay at sight or at a fixed or determinable future time the sum of money clearly specified to, or to the order of, a specified person, or to bearer.  There are usually three parties to a draft: the drawer who issues, signs, and sends the draft to the second party, the drawee. Lastly, there is the payee who is to receive payment made by the drawee.  Banker’s Draft and Commercial Draft  Clean Draft and Documentary Draft  Sight Draft and Time Draft

15. A Draft of Bill of Exchange is an unconditional promise in writing, made buy one person to another, 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.

16. A check is an unconditional order by the drawer or maker, asking his bank to pay a certain amount of money to a third party, the payee.

17. Banker’s Draft is an order from one bank (the drawer) to another (the drawee) with whom it normally maintains a correspondent relationship, to pay to a named person (the payee) a specified sum of money on demand. Commercial Draft, the most commonly-used instrument in world trade, is drawn by a firm or an individual.

18. Clean Draft is the one to which no other documents are attached
Clean Draft is the one to which no other documents are attached. Documentary Draft is the one that can be honored only when certain other documents have been attached to.

19. Sight Draft is the one that is payable on sight of the documents of title or on first presentation of the title documents to him by his bank. 
Time Draft (usance draft, term draft) is the one that is payable in a specified number of days after sight, the date of issue or acceptance, or at a fixed future time.
Issuance, presentation, acceptance, endorsement, discount and dishonor are some of the terms relating to draft and need to be grasped:

20. Section 2: Terms of Payment
Suppose you are doing business with one international company and how would you like to pay in the process of business?

21. Introduction of Various Methods of Payment :
There are five basic methods of obtaining payment for export orders, and according to the order of the exporter’s preference they are:
a. Cash in advance 
b. Documentary letter of credit 
c. Documentary collection 
d. Open account 
e. Payment against goods on consignment

22.  Cash in advance means that the exporter is paid either when the importer places his order or when the goods are ready for shipment.

23. A documentary letter of credit is defined as an instrument by which a bank promises to pay the seller for his goods providing the seller conforms exactly to the conditions laid down in the letter of credit.

24. Parties involved
The parties involved in a letter of credit transaction include: applicant, opening bank, advising bank, beneficiary, negotiation bank, paying bank and confirming bank.
Applicant is the party who applies for the opening of a letter of credit, that is, the importer. 
Opening bank is the bank located in the importer’s country that opens the letter of credit on behalf of the importer.

25. Advising bank is the bank located in the exporter’s country who informs the exporter that a letter of credit has been opened in his favor and transfers the L/C to the exporter 
Beneficiary is the party in whose favor the letter of credit is issued, and who is entitled to receive the payment, that is, the exporter. 
Negotiating bank is the bank that buys an exporter’s draft submitted to it under a letter of credit and then forwards the draft and documents to the opening bank for reimbursement.

26. Paying bank is the bank that makes payment to the beneficiary against presentation of stipulated documents. It is usually the opening bank but can also be a third designated bank.
Frequently, an advising bank is requested to add its own commitment to the letter of credit. In this case, it is called the confirming bank.

27. Procedures
The procedure of opening a letter of credit starts with the foreign buyer agreeing with the exporter that payment will be by a documentary credit. 
The buyer then instructs his bank at his place to open a documentary credit for the exporter on the terms and conditions agreed upon by both the buyer and the exporter.
The issuing bank, not being experts in the product, will require very detailed instructions covering product descriptions: quantities, agreed unit prices and total shipment values, terms of trade, date payment is due after presentation of the correct documents, packing, shipping period and so on. 
It is very common for a buyer to clearly specify a period of validity of the letter of credit.

28. After issuing the L/C, the issuing bank sends it to the advising bank, usually his correspondent bank in the exporter’s country, and asks the bank to advise the exporter of the establishment of the L/C and pass the credit to the exporter for study prior to release of the goods. 
If the seller requires a confirmed letter of credit, then the correspondent bank may be asked to confirm the L/C opened by the issuing bank, and a fee will be charged to the buyer for this service.
After the seller receives the L/C and is satisfied with the stipulations he will be in a position to load the goods.

29. After shipment of the goods, the seller will send the draft accompanied by all the necessary documents to the negotiating bank for negotiation with in the validity of the L/C.
If the documents are full and correct, the bank will pay, or accept the draft and then send the documents to the paying bank (issuing bank).

30. After careful checking of the documents and if no problems are found, the paying bank will reimburse the money to the negotiating bank in accordance with the terms of the credit.
The issuing bank (paying bank) then presents the documents to the buyer for payment or acceptance. 
Documents will be handed over to the buyer upon buyer’s payment of the amount due or acceptance of the draft. With the documents, the buyer can take delivery of the goods.

31. Types of L/C
Revocable L/C and Irrevocable L/C
Confirmed and Unconfirmed L/C 
Sight L/C and Usance L/C 
Transferable and Non-transferable L/C
Revolving L/C 
Back to Back Credit 
Red Clause Credits 
Standby L/C

32. Revocable L/C means that it can be canceled or modified by the issuing bank usually at the will of the buyer without prior approval of the exporter at any time before the documents have been paid or accepted. 
Irrevocable L/C is the one that cannot be modified or rescinded by the opening bank without express permission of all parties, including the exporter, importer, and intermediary banks.

33. Confirmed L/C represents the obligation of the confirming bank in the exporter’s locality, usually the advising bank. It means the confirming bank guarantees payment if the issuing bank cannot pay. 
Unconfirmed L/C means that the L/C doesn’t have any payment guarantee by a bank in the exporter’s country.

34. Sight L/C means payment is immediately made to the beneficiary on presentation of the stipulated documents and on condition that all terms of the credit have been complied with. 
Usance L/C or Time L/C implies that the seller is paid in a specified number of days after the presentation of the stipulated documents.

35. Transferable credits arise where the exporter is obtaining the goods from a third party, say the actual manufacturer, and, as the middleman, does not have the resources to buy outright(用现金购买） and await payment form his overseas customer.  
Non-transferable credit is one that can not be transferred.

36. Frequently, in international trade a buyer will purchase regularly from a foreign supplier. To facilitate such repeat shipments between the same buyer and seller, a revolving letter of credit may be used.

37. Back to back credits(背对背） means that the middleman receives a credit in his favor from the buyer and asks his bank (usually the advising bank is the primary credit) to establish a second credit in favor of his supplier against the security of the credit in his own favor.

38. Red clause credits are also called anticipatory（预支） credits
Red clause credits are also called anticipatory（预支） credits. This instrument is similar to a normal letter of credit except that it contains a clause (originally typed or printed in red) authorizing the negotiating bank to make clean advances of a certain percentage or the total amount of the L/C to the exporter. 
The clean advances are based on the guarantee of the opening bank and the importer, which means that the opening bank or the importer is liable for repayment plus interest in cases where no shipment is made under the letter of credit or when the loan in not repaid by the beneficiary.

39. This type is different from other types in that the buyer and seller hope it will never be drawn upon.
They are often used as a kind of “back up” in the event of the buyer not paying for the goods.
They normally require the issuing bank to make payment to the seller upon presentation of documents evidencing non- payment by the importer. 
Standby L/C can only be used when the applicant fails to fulfill its payment obligation.

40. Sample Letters
Dear Sirs, We are pleased to receive your inquiry of 5th July and enclose our illustrated catalogue and price list. We are confident you will be interested in our products and welcome your further inquiry. As to our terms of payment, we usually adopt confirmed and irrevocable letters of credit in our favor, payable by draft at sight, reaching us one month ahead of shipment, remaining valid for negotiation in China for a further 21 days after prescribed time of shipment and allowing transshipment and partial shipment. We hope the above payment terms will be acceptable to you and expect to receive your trial order soon. Looking forward to your early reply. Sincerely yours,

41. Analysis of the letter structure
 1. In the opening paragraph, you are expected to state directly and clearly which letter you are writing about, using the following sentence structures:  We are happy to receive your letter of  We appreciate your letter of  Thank you very much for your letter of

42. 2. In the transitional part, mention the method of payment your company usually uses, using the following sentence structures: 
As to the method of payment, we would like to
Regarding to the mode of payment 
For the payment 
3. In the closing part, express your hope that the method of payment can be acceptable to your business partner, using the following sentence structures: 
We hope the payment can be acceptable to you 
We are looking forward to hearing from you ASAP.!

43. Practice
The students are required to analyze the letter explaining the reason of the delayed payment 
Dear Sirs,
We have received your letter reminding us that our payment is overdue on September 16. It had been our intention to clear this before now, but the seasonal trade depression here has resulted in extremely slow payment of our own customers’ accounts.
This has caused a temporary inconvenience. The amount of the settlement is being sent today to you through Bank of China. Nanjingby telegraphic transfer and you will receive it in a couple of days. We hope that you will realize out awkward situation and give your assistance in our business Yours faithfully,

44. This lecture covers the following points: 
Summary
This lecture covers the following points: 
Brief introduction to the five basic methods of payment in international trade and focusing on two of them ( Cash in advance and L/C) 
Analysis of various types of L/C 
Parties involved and procedures by L/C

45. Assignment
Write a letter to explain why your company hasn’t paid for the cargoes arrived last week, amount No 2453 and express your expectation of getting the payment done within one week. The following sentences can be helpful for your writing: 
Further to our letter of 
This was due for payment by 
Please forward your payment

46. Section 3 Documentary Collection
Teaching Objectives:
Enable the students to understand the definition of Documentary Collection, Open Account and Payment against Goods on Consignment
Enable the students understand the advantages and disadvantages of each method of payment
Enable the students to how to write letters to recommend the appropriate method of payment in international trade.

47. Introduction to ： Documentary Collection  Open Account 
Payment against Goods on Consignment

48. Documentary collection is a method by which the exporter authorizes the bank to collect money from the importer.
There are two types of the documentary collection: Documents against Payment (D/P) and Documents against Acceptance (D/A)

49. The open account system is one of the principal methods of settlement in international trading practice. 
The exporter dispatches goods, sends the appropriate documents of title, e.g. bills of lading, together with an invoice, and then has to wait for payment. 
The goods thus pass into the customer’s possession before payment is made and the exporter has only the protection of the particular contract of sale. 
Due to the high risk to the exporter, open account is usually adopted when the exporter is well acquainted with the financial status of the buyer and has no doubt about his solvency, or when the exporter sells goods to his own overseas branch or subsidiary.

50. Consignment sales are usually used as a way of expanding overseas sales and especially opening up markets for new products. 
Goods shipped on consignment enable the exporter to place stocks in the importing country without actually giving up the title of ownership. 
The consignee sells the goods on behalf of the consignor and gets a certain percentage of commission. 
Normally, the exporter will not receive any payment until sales are made in the overseas country and the goods may always be sent back without liability on the part of the importer/consignee.

51. Stocks therefore might represent a considerable amount of capital locked up in the overseas market and exposed to all the normal commercial, plus political and climatic risks. 
Due to the high risk, the exporter should have a clear understanding of the credit of the agent before using the method and be fully aware of the risks involved.

52. Such consignment operations are best based on a consignee who is well known and committed to the exporter. 
Under this term, the exporter gets the money after the goods have been sold out. The consignee would render monthly accounts of sales and send the consignor the payments due after deduction expenses, and an agreed rate of commission. 
The above methods of payment including cash in advance, L/C, documentary collection, open account, and so on are all used in exporting and all have their drawbacks and advantages.

53. Sample Analysis
Gentlemen: 
We are pleased to receive your inquiry of 17th October and enclose our illustrate catalogue and price list. We are also sending you by separate post some samples and feel confident that when you see them you will agree that the goods are both excellent quality and reasonable in price. 
As to the modes of payment, we usually adopt confirmed and irrevocable letters credit payable by draft at sight. However, in order to expand business, we will, as an exceptional case, accept payment for your trial order on D/P basis, provided the amount involved is less than US $1000. In other words we will draw on you by documentary draft at sight, through our bank, on collection basis.

54. We hope the above payment terms will be acceptable to you and expect to receive your trial order in due course.  Looking forward to your early reply. 
Yours truly

55. Translate the following L/C into Chinese
Practice
Translate the following L/C into Chinese
The Trade Bank 
525 Market Street, 25th Floor 
San Francisco, California USA 
To: Indonesia Export Bank 
Jakarta, Indonesia 
We hereby issue our irrevocable documentary credit No 
Date of issue: May 15, 2005 
Date of expiry: July7, 
Place of expiry: Indonesia

56. Applicant: Beneficiary:  US Coffee Importer ABC Coffee Exporter San Francisco, California USA Jakarta, Indonesia
Amount: US$65 000, Sixty-five thousand US dollars only. 
Credit available with any bank, by negotiation for payment of beneficiary’s draft at sight drawn on The Trade Bank for 100 percent of invoice value 
Partial shipment: Not allowed 
Transshipment: Allowed

57. Shipment from Indonesia not later than June 16, 2005 to San Francisco, California USA
Goods: Fifteen metric tons of 60-kilo bags of Sumatra Arabica Grade 1 coffee as per buyer’s purchase order No to be shipped in one ocean container. 
CIF San Francisco, California USA

58. Documents Required 
original and four copies of signed commercial invoice
negotiable insurance policy or certificate for at least 110 percent of invoice value, covering all risks, indicating loss, if any, payable in the United States in US dollars 
Full set of clean on board ocean bill of lading to the order of shipper blank endorsed marked freight prepaid showing notify John Smith & Company 123 Main Street San Francisco.

59. Drafts must indicate the number and date of credit.
This credit is subject to the Uniform Customs and Practice for Documentary Credits (1993 revision), International Chamber of Commerce, Publication No 
Period for presentation; Documents must be presented at place of expiration no later than 21 days after date of shipment and within documentary credit validity. 
Confirmation instructions: Without

60. Please write a letter to explain the reason of the delayed payment.
Assignment
Situation: 
Payment of your company is overdue on September 16 because your company hasn’t received money from the customers. Your company has sent part of the money this morning. 
Please write a letter to explain the reason of the delayed payment.