Payment of Goods

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Chapter5

• Payment of Goods

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Key points

• 3 Instruments of Payment
• Draft Check Promissory
  Note
• 3 Methods of Payment
• Remittance Collection L/C.
• 3 methods of financing for trade
• Bank Guarantee
• Factoring
• Forfeiting

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Credit instruments used in settlement of trade

• 1. Introduction to negotiable instrument
• 1) definition (pp.105)
• 2) nature and functions
• 3) parties to a negotiable instrument
• Immediate parties, remote parties,

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• 2. Bills of exchange/Draft
• A bill of exchange is an unconditional order in
  writing, addressed by one person (drawer/???) to
  another (drawee/???), signed by the person giving
  it, requiring the drawee to pay on demand, or at
  a fixed or determinable future time, a sum of
  money to, or to the order of, a specified person
  (the payee/???), or to any bearer(???).

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• 1). Parties to a bill of exchange
• Drawer ??? The person who draws the bill of
  exchange and he is usually the exporter or his
  banker in international trade.
• Drawee / Payer ??? The person who is to pay
  the money and he is usually the importer or the
  appointed banker under a letter of credit in
  international trade.
• Payee ??? The person who is to receive the
  money, he may be, and often is, the same person
  as the drawer and he is usually the exporter
  himself or his appointed banker in business or he
  may be the bearer of the bill.

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• 2) Acts of a bill of exchange
• Issuance
• Endorsement blank, special, restrictive,
  conditional
• Presentment
• Acceptance
• Payment
• Dishonor
• Notice of dishonor
• Protest
• Right of recourse

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• Acceptance for honor supra protest(????)
• Payment for honor supra protest(????)
• Guarantee
• Discounting
• 3) Classification of bill of exchange
• According to the drawer, (????/????)
• Bankers draft both drawer and drawee are banks.
  
• Commercial draft drawer is co., drawee co. or
  bank.

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• According to whether accompanied with shipping
  documents Clean bill (??) without other
  documents. Documentary bill (????) with other
  com. documents.
• According to the time of payment Sight bill
  (????) payer must pay when it is presented.
  Usance bill or Time bill (????) payer must pay
  at a fixed future time.

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• According to the acceptor traders acceptance
  bill and bankers acceptance bill

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• 3. Promissory Note
• Promissory note is an unconditional promise in
  writing made by one person to another signed by
  the maker, engaging to pay, on demand or at a
  fixed or determinable future time( within 2
  months according to Chinas law ), a sum certain
  in money to, or to a order of, a specified person
  or to a bearer.

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• 1) Types of the promissory note
• Bank note issued by the bank
• Commercial note issued by the business or the
  person.
• 2) Characteristics of a promissory note
• Unconditional promise maker and payee no need
  to accept only an original note

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• 4. Check
• A cheque / check is an unconditional order in
  writing drawn on a bank signed by the drawer,
  requiring the bank to pay on demand a sum certain
  in money to or to the order of specified person
  or to a bearer.

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• 1) characteristics of a check
• Unconditional bank certain money date payee
  no need to accept sole instrument
• 2) Types of Check
• Cash cheque and transfer cheque
• Crossed cheque and non-crossed cheque (without 2
  parallel lines on up-left corner of the check) .

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• Open check
• certified check
• bankers check
• check payable to order
• check payable to bearer

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Methods of settlement for international trade

• 1. Remittance ??
• Remittance means that the buyer remits money to
  the seller through a bank on his own initiative.

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• Parties of remittance and the steps
• Remitter ???
• Payee or beneficiary ???
• Paying bank ???
• Remitting bank ???
• Classification of remittance
• Remittance is classified into 3 kinds
• 1) Mail transfer (M/T) (??)
• 2) Telegraphic transfer (T/T) (??)
• 3) Demand draft (D/D) (??)

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procedure of T/T
remitter (debtor)
payee (creditor)
?application
?notice
?payees receipt
?receipt
?payment
?entrust note
Paying bank
Remitting bank
?debit notice After payment
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procedure of M/T
remitter (debtor)
payee (creditor)
?application
?notice
?payees receipt
?receipt
?payment
?M/T advice
Paying bank
Remitting bank
?debit notice After payment
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M/T advice
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Payment order
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Procedure of D/D
Remitter debtor
payee creditor
?bankers D/D
?bankers D/D
?application
?bankers D/D
?payment
Paying bank
Remitting bank
?debit notice
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Form of D/D
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comparison
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• reimbursement of remittance cover
• A.

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• B.

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• C.

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• D.

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• payment in advance
• open account payment after arrival of goods,
  sold on credit
• A goods sold
• B sold on consignment

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• 2. Collection ??
• Collection means that the exporter asks his bank
  to arrange for the acceptance or payment of the
  bill overseas, and the bank will carry his task
  through its own branch office abroad or a
  correspondent bank.

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• Parties involved in collection
• Principal or exporter ???
• Remitting bank ????
• Collecting bank ????
•  Payer or importer ???
• Presenting bank ???

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participants
principal
drawee
Collecting/presenting bank
Remitting bank
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• types of collection
• 1) clean collection, clean bill for collection
• It means that the exporter collects the purchase
  price against the draft only, without any
  shipping documents attached thereto.
• This method is usually used in collecting balance
  under L/C, advance (????), commission and costs
  of samples.

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• 2) documentary collection????
• Document against payment (D/P)????
• Bank releases documents to buyer only against
  a cash payment.
• D/P at sight ??????
• D/P after sight ??????
• Documents against acceptance (D/A)????
• Bank releases documents to buyer against
  acceptance of a bill of exchange (draft)
  guaranteeing payment at a later date.

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D/A
?contract
principal
drawee
?shipment, b/l
?delivery
shipper
?presentation
?time bill
?application,documentary
bill
?payment
?receipt
?payment
?acceptance
?d/r
?collection advice d/b
Collecting bank
Remitting bank
?payment remitted
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• The risks and advantageous to seller and buyer
• D/P D/A are commercial credit.
• Collections constitute a risk to seller.
• But they are advantageous to the buyer for buyer
  should not open L/C and saving money.
• When market is down or seller is seeking new
  markets, collection may be a good option.

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Case

• On April 9, 2001, a remitting bank accepted an
  outward collection business of D/P at sight with
  the amount of US100,000. Following the
  exporters instructions, the remitting bank
  mailed the full set of documents together with a
  collection instruction to a collecting bank in
  the US. A week later, the principal claimed that
  the importer required the remitting bank to
  change D/P at sight into D/A at 60 days
  sight. The principal ignored the remitting
  banks warning about the high risk of D/A and
  insisted on the change, so the remitting bank
  sent a modification instruction. However, the
  collecting bank never sent the notice of

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• Acceptance. Then one of the returned original
  bills of lading was missing. Furthermore, the
  principal learned that the goods had been picked
  up by the importer.

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• 3.Letter of credit
• A written document undertaking by the issuing
  bank given to the seller, at the request of the
  buyer, to pay at sight or at a future date to a
  stated sum of money.
• The L/C is only good for a stated period of time
  and payable on presentation of stipulated
  documents.
• The L/C is a reliable and safe method of
  payment, facilitating trade between unknown
  parties and giving protection to both the seller
  and the buyer. So, the advantage of L/C is that
  it minimizes risks to overseas customers.
• L/C is a most commonly used method of payment in
  the financial business of international trade.

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• The nature of the letter of credit
• L/C is a guarantee from the bank
• The issuing bank gives guarantee to the
  beneficiary, if the beneficiary carries out
  contract according to the L/C, the issuing bank
  shall pay.
• The feature of the L/C
• 1. the bank has primary liabilities for payment.
  ??
• 2. It is a self-sufficient document.
  ???????
• 3. It is a pure document deal.
  ?????

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• Kinds of L/C
• 1) According to whether the draft is accompanied
  with the shipping document, L/C can be divided
  into
• Documentary L/C ?????
• The bill of exchange should be accompanied with
  shipping documents the L/C pointed. Mainly used
  in international trade.
• Clean L/C ????? The bill of exchange isnt
  accompanied with shipping documents. Mainly used
  for payment between head office its branches.

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• 2) According to the responsibilities that the
  issuing bank bears, L/C is classified into
• Revocable L/C ??????
• The opening bank may amend or revoke the
  credit before negotiation, acceptance or payment
  without agreement of the beneficiary.
• It can not be revocable after payment.
• its hardly used in international trade.

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• Irrevocable L/C ???????
• Once the L/C is opened, without agreement of
  the beneficiary, the opening bank cant amend or
  revoke the L/C within its validity. As long as
  the beneficiary provides the documents in
  accordance with the stipulation in the L/C, the
  opening bank shall perform its duty of payment.
• According to UCP 500, the L/C unmentioned whether
  it is revocable or irrevocable is irrevocable.

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• 3) According to whether the bank confirms, the
  irrevocable L/C can be classified into
• Confirmed L/C ?????
• The L/C is guaranteed by a bank other than the
  issuing bank.
• Double guarantee can be got to seller from the
  confirming bank and issuing bank. Confirming bank
  is the first payer.
• Unconfirmed L/C ??????
• The irrevocable L/C is not guaranteed by a bank
  other than the issuing bank.
• It is acceptable if the issuing bank is
  well-known and
• 
  large enough.

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• 4) According to the method of payment
• Negotiation L/C ?????
• The beneficiary of the L/C may negotiate for
  the payment with the appointed bank or any other
  banks.
• Open negotiation L/C ??????
• Restricted negotiation L/C ????????
• The negotiation bank may claim to the beneficiary
  if the documents are not corresponding with the
  terms of L/C, and could not take back of the
  payment from the issuing bank.
• Payment L/C ?????
• The L/C which the paying or issuing or
  confirming bank can not claim to the beneficiary
  if the payment has been made.

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• 5) According to the time of payment,L/C can be
  classified into
• Sight L/C ???????
• The L/C which the issuing bank or any other
  appointed bank make the payment to beneficiary at
  the moment when receiving the draft.
• Sight L/C includes sight negotiation L/C and
  sight payment L/C
• Deferred L/C ???????
• In which the buyer deliver the goods by accepting
  the documents and agree to pay the bank after a
  fixed period of time. Buyer may allowed to pay in
  the fixed future time.
• e.g. 30 days after taking documents, 25 days
  after the date of shipment, a fixed future time.

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• 6) According to whether the L/C can be
  transferred or not, it is classified into
• Transferable L/C ??????
• The beneficiary may allow to transfer all or part
  of the proceeds (payment) of the L/C to second
  beneficiary, usually the ultimate supplier of the
  goods. Commonly used in the middle-east.
• Non-transferable L/C ???????
• Beneficiary has no right to transfer the L/C to
  the others, only himself may use it.
• Any L/C without the TRANSFERABLE is not
• Transferable one.

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• 7) Some special L/C
• Revolving L/C ?????
• The issuing bank restores the credit of original
  amount after it has been used. The number of
  times utilized and the period of validity is
  stated in the credit.
• It is useful for thick transaction during a fixed
  period.
• Acceptance L/C ?????
• The paying bank accepts the time draft and
  documents after receiving L/C when the
  beneficiary presents the time draft to the bank,
  and pay the price on the due date.
• It is usually used in usance transaction.

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• Reciprocal L/C ?????
• The L/C which the seller and buyer open each
  other for buying materials or parts and the final
  goods.
• It is usually used in counter-trade, processing
  trade (processing with imported materials, parts
  or designs).
• Back-to-back L/C ?????
• A new credit opened on the basis of an already
  existing, nontransferable credit.
• It is used by traders to make payment to ultimate
  supplier.
• A trade gets a documentary credit from buyer and
  then opens another credit in favor of supplier.

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• Red clause L/C ??????
• It is used to pay the supplier with some funds in
  advance before shipment to finance production of
  the goods.
• The credit may be advanced in part or full, and
  the buyers bank finances the advanced payment,
  so the bank must ask seller to store the goods by
  name of the bank.
• Swift L/C ???????
• It is only a standard format to exchange the
  messages of L/C, foreign exchange, security
  exchange, L/G etc. though an international
  non-profit organization called Society for
  Worldwide Interbank Financial Telecommunication.
• Its widely used in international trade in
  Tele-opened credits since its much more safety,
  simple, fast and convenient.

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• Standby L/C ?????
• It is a payment guarantee primarily used in some
  countries (e.g. USA) forbidding opening L/C, but
  only used as a backup payment method if the
  original payment method is past due.
• It has the same function as L/C, the
  beneficiary can get the payment from this kind of
  credit, but buyer may take more risk.

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• The beneficiary drew a draft under a L/C with the
  payee of Bank of Communications, Nanjing Branch.
  After Bank of Communications, Nanjing Branch
  endorsed the draft, Bank of China Nanjing Branch
  sent the documents to and claimed reimbursement
  from the issuing bank. The issuing bank, however,
  refused to pay because it believed that Bank of
  Communications, Nanjing Branch was not a
  negotiating bank.

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Methods of financing for trade

• 1. Factoring ??
• The exporter assigns his accounts receivable to
  bank or factoring agent (the factor), aiming at
  getting cash at a discount from the face value in
  collection.
• The advantages for importer
• 1. purchasing goods on credit.
• 2. refusing payment if goods dont meet
• contract
• 3. saving fees associated with opening L/C.

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• The advantages of factoring for exporter
• 1. offering more competitive payment
  conditions
• 2. buyers credit risk being shouldered by
  factor
• 3. getting advance payment for his shipment
• 4. saving investigation cost (factor takes)
• 5. avoiding the complex procedures of
• opening L/C.

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• 2. Forfeiting ??? (?????????)
• The selling, at a discount, of medium to longer
  term accounts receivable or promissory notes of a
  foreign buyer for immediate payment, usually a
  large sum of money and may carrying the
  guarantee of foreign bank or even the government.
  
• exporting jets, huge tanks, equipments of nuclear
  power station etc.

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• The advantages of forfeiting for exporter
• Providing cash financing for the exporter
• Importers bank acts as guarantor for the
  receivables.

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• 3. Bank Guarantee ????
• An undertaking by a bank to settle a debt
• if the debtor fails to make payment.
• A bank guarantee can be used as security for
  loan.
• It is a kind of bank credit and is widely used in
  international trade.