Payment Terms

More complicated
 Arrangements are international---long
distance and more procedures involved
 Longer time
 Different regulations and systems of law
 Different monetary and financial matters and
methods in different countries
 Payment instruments
 Drafts (the most common one)
 Promissory notes
 Checks
 Money orders
 Credit cards
 Cash (rarely used)
Draft/bill of exchange---definition
and contents
 A draft is an unconditional order in writing signed by one
party(drawer) requesting a second party (drawee/payer) t
o make payment in lawful money immediately or at a det
erminable future time to a third party(payee)
 Basic contents
 The word “exchange”
 An unconditional order in writing
 Date and place of issue
 Time of payment
 Name of payee
 Currency and amount
 Name of drawee/payer
 Drawer’s name and signature
 Draft/bill of exchange---types
 Commercial draft---by a firm
 Banker’s draft---between banks
 Sight draft---payable on presentation
 Time/usance draft---payable in a specified number
of days after its date of issue/acceptance/B/L/at a f
ixed future date
 Clean draft---no other documents attached
 Documentary draft---certain documents attached
 Use of drafts
 Issuance---to order/ to bearer
 Presentation
 Acceptance
 Payment
 Endorsement
 Dishonour and recourse
 Dishonored bills and protests
 Dishonored bill—draft that the drawee refuses or
is unable to pay or accept
 Exercise the right of recourse
1. Obtain a certificate of protest
2. Present the second time
3. Publish the certificate----give the drawee pressur
e—damage his commercial creditability
4. Legal action
 Promissory note and check
 Promissory note—an unconditional promise in w
riting made by one person(the maker) to another
(the payee/the holder) signed by the maker enga
ging to pay on demand or at fixed or determinabl
e future time a sum of money to or to the order o
f a specified person or to bearer
 Check—an unconditional order in writing addres
sed by the customer(drawer) to a bank (drawee)
signed by the customer authorizing the bank to p
ay on demanding a specified sum of money to or
to the order of a named person or to bearer(pay
ee)
 Method of payment
 The importer---get the goods as ordered
 The exporter---the security of payment
 Terms of payment reflect the extent to which
the seller requires a guarantee of payment
before he loses control of the goods.
 Main methods of payment used in China
include remittance, collection and letter of
credit.
 Methods of payment---remittance
 Remittance---transfer of money from one
party to another party through banks.
 Parties involved in remittance are:
 Remitter
 Payee/beneficiary
 Remitting bank
 Paying bank
 Methods of payment---remittance
 Types of remittance
 Mail transfer, M/T—transfer of money from the remitting bank
to the paying bank by mail (relatively low cost and speed).
 Telegraphic transfer, T/T—transfer of funds by
telecommunication system such as telex or cable (fast speed
and high cost).
 Remittance by banker’s demand draft, D/D– cheaper but
slower
 Difference between D/D and T/T or M/T
 By D/D, the remitting bank needn’t inform the payee to come
to the bank and get paid.
 D/D can be transferred through endorsement and is negotiable
provided that there is opposite stipulations of restrictions.
 Methods of payment---remittance
 Use of remittance in international trade
 Payment after arrival of the goods—open account
transaction; highly risky for exporters; based on
business credit.
 Payment in advance--highly risky for importers
 Cash with order
 Cash payment before shipment
 The buyer shall pay the total value( partial value)
to the seller in advance by T/T( M/T or D/D) not
later than
 Methods of payment---remittance
 Cash with order---pay when placing the order
 Attract sales
 High risk of loss to the importer as the exporter may not ship
the goods
 Cash payment before shipment ---pay when the goods
ready for shipment
 The exporter faces little risk
 Ascertain the payment has been actually received
 Methods of payment—collection
 Collection is the process wherein a bank, in
accordance with the seller’s instruction,
handles documents( B/L, invoice, insurance
policy, etc.) in order to deliver them to the
buyer against payment, acceptance, or on
other terms and conditions.
 Methods of payment—collection
Parties involved in a collection
 Principal---drawer, usually the seller
 Remitting bank---in the seller’s country working as
the agent of the seller
 Collecting bank---in buyer’s country presenting the
documents to the buyer, usually the remitting bank’
s overseas branch or correspondent bank
 Presenting bank—the bank presenting the draft an
d other documents to the payer; usually a bank wh
ich has current account with the payer or the colle
cting bank itself
 Payer---drawee, usually the buyer
 Methods of payment—collection
Types of collection
 Clean collection—the exporter gets paid with the draft only, ie. Without
presentation of any other business documents.
 Documentary collection—a means that ensuring that goods( title docu
ments) are only handed over to the buyer( by a bank) when the amoun
t shown on a bill of exchange is paid or when the customer accepts the
bill as a contract to pay by a specified date.
 Documents against payment, D/P-- documents can only be released to
the buyer when he has paid the amount on the draft
 D/P Sight—documents against payment at sight---documents can only
be released to the buyer when he has paid the amount on the draft as
soon as the buyer is presented the draft
 D/P After Sight—the buyer will pay the draft amount a specified numbe
r of days after the draft is presented and accepted.
 Documents against acceptance, D/A---the documents representing the
title to the goods will be released to the buyer once the buyer has acce
pted the draft.
 Risks of documentary collection
 Buyer cannot pay
 When price decreases, buyer might refuse
to pay or a lower price
 Buyer might take advantage of seller’s
ignorance of the local commercial custom,
regulation or law and cheat at transactions
 The authorities of some importing country
might not be trustworthy
 Disposal of goods in case of
payment default
 Dump the goods in the sea if the value is
lost
 Warehouse the goods while negotiating with
the buyer for payment, if the storage cost is
very high
 Sell the goods to any taker at a lower price if
shipping the goods can be costly and the
value of the goods is not very high
 Return the goods
 Risks of collection for buyers
 Rely on seller’s reputation and ability to
deliver high-quality goods
 The seller might have sold the documents to
another buyer at a higher price
 Measures to avoid risks
 Pay or accept after arrival of goods and a
preliminary examination
 Accept the draft with conditions authorized
by the drawer
 Characteristics of collection
 Importer is the payer. The bank is not responsible
for the payment. Collection is a kind of commercial
credit.
 In D/P, before the importer actually pays the price,
title to the goods still belongs to the exporter who
has a right to resale the goods.
 In D/A, the exporter bears high risk of losses of both
the goods and the money.
 Collection benefits the importer very much and
therefore can be used to attract sales of stockpiling
commodities as well as to increase the exporter’s
ability of competition in the world market.
 Methods of payment---Letter of Credit

 Documentary credit—a written undertaking by a

bank given to the seller at the request, and in
accordance with the instructions, of the buyer to
effect payment up to a stated sum of money, with
a prescribed time limit and against stipulated
documents.
 Characteristics of L/C
 A kind of bank credit
 An independent and self-sufficient document
 A kind of documentary transaction
 Methods of payment---Letter of Credit

 Functions of L/C
 For the exporter’s part, he can get paid relatively
safely as long as he provides relevant documents
in conformity with stipulations in the L/C.
 For the exporter’s part, he’s guaranteed to get the
title documents and receive qualified goods in
time. If a time L/C is used, the exporter can be to
some extent financed.
 For the bank’s part, it can charge fees for issuing
and negotiating an L/C. it can also use the deposit
of the applicant to quicken its capital turnover.
 Methods of payment---
Documentary Credit
 Parties to a credit
 Applicant—at whose request a bank is to issue a credit(usually im
porter)
 Beneficiary—whose favor the credit is to be issued(exporter)
 Issuing bank—opens the credit
 Advertising bank—in the exporter’s location
 Confirming bank—adds its own undertaking to that of the issuing b
ank
 Paying bank
 Accepting bank—accepts a usance bill of exchange
 Negotiating bank—negotiates or discounts the bill of exchange
 Remitting bank—sends the documents to the issuing bank
•Credits are separate
transactions from the Issuing Bank
sales or other contracts
•Banks are in no way The terms of L/C
concerned with or
bound by such contracts
•In credits operations all Beneficiary Applicant
parties concerned deal
with documents not
goods or services
 Basic items of L/C
 Issuing bank and branch
 Place and date of issue
 Applicant’s name and address
 Beneficiary’s name and address
 Type of L/C
 Advertising bank
 Negotiating bank
 Date and place of expiry
 Currency and sum
 Terms( as same as contract terms)
 Engagement clause
 Conditions and instructions to advertising/negotiating bank
 Authorizing signatures
 Examination request
General procedures of using L/C
1. The buyer and the seller conclude a sales contract
2. The buyer instructs his bank to issue a credit
3. The issuing bank asks another bank to advise or confirm the credit
4. The advising bank informs the seller
5. The seller receives the credit and load the goods and dispatch
6. The seller sends the documents to the bank
7. The bank checks the documents against the credit and decide
whether to pay
8. The bank, if other than the issuing bank, sends the documents to
the issuing bank
9. The issuing bank checks the documents and effects payment
10. The issuing bank releases the documents to the buyer upon
payment of the amount due
11. The buyer sends the transport document to the carrier and gets the
goods
 Types of L/C
 Clean credit vs. documentary credit
 Revocable L/C and Irrevocable L/C
 Revocable L/C—one that may be amended or
cancelled by the issuing bank at any moment and
without prior notice to the beneficiary before the
documents have been paid, accepted or
negotiated
 Irrevocable L/C—one that cannot be amended or
cancelled without express permission of all parties
 UCP 400----UCP 500
 Types of L/C---Sight and Time L/C
 Confirmed L/C vs. unconfirmed L/C
 A confirmed L/C has the commitment of the confirming bank b
esides that of the issuing bank’s commitment.
 An unconfirmed L/C contains the commitment of the issuing ba
nk only.
 Sight L/C vs. time L/C
 Sight L/C
 Sight payment documentary credit
 Sight negotiation documentary credit
 Time L/C
 Negotiation documentary credit with a usance draft
 Acceptance documentary credits
 Deferred payment credits
 Types---Transferable L/C and Untransferable L/C

 Transferable credit is one that can be transferred(only once)

by the original (first) beneficiary to another(second)
beneficiary
 Used when the first beneficiary does not supply some or all
the merchandise himself but is only a middle man and thus
wishes to transfer part, or all, of his rights and obligations to
the actual suppliers as second beneficiary
 Not recommended in the following situations
 The middleman does not want the importer to know he is a
middleman
 The importer does not trust the exporter or supplier
 The L/C cannot be transferred to the exporting country
 The supplier does not accept a TLC
 When different currencies are involved
 Back to Back L/C
 A back to back L/C is one that is opened at the request of an
exporter who is the beneficiary of an export L/C which is offered as
the security for the back to back L/C
 Involves the issue of a second credit applied by the exporter in favor
of his supplier
 The second credit must be so worded as to produce the documents
(apart from the commercial invoice) required by the first credit—and
to produce them within the time limits set by the first credit—in order
that the exporter, as the beneficiary under the first credit, may be
entitled to be paid within those limits.
 There is a risk to banks
 Banks will want to make sure that there is a good coordination
between the terms of the original L/C and those of the back-to0-back
L/C
 Revolving L/C
 One that is issued for a specific amount which
renews itself for the same amount over a given
period.
 Used by an importer who anticipates a regular flow
of merchandise from a particular foreign supplier
when there are a series of shipments at regular
intervals and the parties involved wish the program
to proceed without interruption.
 The exporter will ship the goods, present documents
to the bank and get paid. Then the credit become
available again in the original form to the exporter
and another shipment can be made.
 Red Clause L/C
 L/C with a clause (originally typed or printed in red
ink to draw special attention) that authorizes the a
dvising bank to make clean advances of a certain
percentage or the total amount of the L/C to the ex
porter to allow the beneficiary to obtain an advanc
e or preshipment advances from the advising or co
nfirming bank at the responsibility of the issuing ba
nk.
 Designed to finance the beneficiary’s purchase of r
aw materials to manufacture the goods or to make
cash payments to the supplier
 Standby L/C
 Intended to cover a non-
performance(default) situation
 A sum will be paid to the beneficiary on
demand in the event the beneficiary submits
a signed statement(default claim) setting
forth that there has been default.
 Disadvantages of L/C
 High cost
 The amount of time that has to be spent
 Accuracy of documentation is a must
How to decide if the L/C should be used
 Corporate credit policy and the company’s ability to
absorb risks
 Credit standing of the importer
 Political environment in the importing country
 Current market conditions and payment terms
offered by competition
 Type of merchandise to be shipped and the value
of the shipment
 Type of exchange controls in the importing country
and the buyer’s ability to get foreign exchange
 How to handle documentary discrepancies

 Correct the discrepancies and resubmit the

documents and draft within the validity of the L/C
 Request the importer to waive discrepancies if
they do not materially affect the shipment
 Provide a documentary discrepancy guarantee if,
unwilling to wait for the waiver, the exporter is
confident that the importer will accept the
discrepancy
 Submit the documents on collection basis
 Open Account
 An arrangement in which the credit is extended to
an individual, firm, corporation or other legal entity
based on an estimate of the general ability to pay
 Procedures
 The seller dispatcher the goods
 Sends the invoice to the buyer
 When goods are dispatched, the title to the goods
transfers to the buyer
 The seller stipulates a time period in which
payment is to be made. 2/10—the buyer can take
two percent off if he pays within 10 days
Advantages and disadvantages
 Advantages
 great flexibility and convenience
 The use of bank is reduced to minimum, less
cost
 Disadvantages
 Total loss for the seller due to lack of real
evidence of indebtedness (risks---the buyer’s
insolvency and willful default)
 Delay in payment can be indefinite
Insolvency--state of bankruptcy: the condition of being unable
to pay debts, or an instance of this
Default--failure to do something: a failure to meet an
obligation, especially a financial one
 Prime considerations for a sale
on open account
 The credit standing of the buyer
 The relationship
 Prior collection experience with a buyer
 The payment record and rules of the
importing country such as the type of
foreign exchange controls
 Payment clause in a contract for
international sale of goods
 Clause of remittance
 The buyer shall pay 100% of the sales proceeds in advance by T/T to reach the seller not
later than…
买方应不迟于 X 月 X 日将 100 ％的货款用电汇预付至卖方
 Clause of collection
 D/P at sight
upon first presentation the buyer shall pay against documentary draft drawn by the seller
at sight. The shipping documents are to be delivered against payment only.
买方应凭卖方开具的即期跟单汇票于见票时立即付款，付款后交单。
 D/P after sight
the buyer shall pay against documentary draft drawn by the seller at…days after date of
B/L. the shipping documents are to be delivered against payment only.
买方凭卖方开具的跟单汇票，于提示日后 x x 天付款，付款后交单。
 D/A
the buyer shall duly accept the documentary draft drawn by the seller at x x days sight u
pon first presentation and make payment on its maturity. The shipping documents are to
be delivered against acceptance.
买方对卖方开具的见票后 x x 天付款的跟单汇票，于第一次提示时即予以承兑， 并应于汇
票到期日即付款，承兑后交单。
Payment clause in a contract for inte
rnational sale of goods
 Clause of L/C
 Sight L/C
the buyer shall open through a bank acceptable to the seller an irrevoc
able sight L/C to reach the seller…days before the month of shipment,
valid for negotiation in China until 15th day after the month of shipment
.
买方应通过卖方所接受的银行，于装运月份前 x x 天开立并送达卖方不
可撤销即期信用证，议付有效期到装运月份后 15 天在中国到期。
 Time L/C
the buyer shall open through a bank acceptable to the seller an irrevoc
able banker’s acceptance L/C to reach the seller…days before the mo
nth of shipment, valid for negotiation in China until 15th day after the m
onth of shipment.
买方应通过卖方所接受的银行，于装运月份前 x x 天开立并送达卖方不
可撤销即期银行承兑信用证，议付有效期到装运月份后 15 天在中国到
期
 Key Terms
 Draft  Applicant
 Commercial draft  Beneficiary
 Banker’s draft  Issuing bank
 Sight draft  Advising bank
 Clean draft  Paying bank
 Dishonor  L/C
 Promissory note  Sight L/C
 Check  Time L/C
 Cash in advance  Documentary collection
 TT  D/P Sight
 Key Terms
 D/P After Sight
 D/A
 Open account
 Insolvency
 Willful default