1

CHAPTER IX CHAPTER IX TERMS OF PAYMENTTERMS OF PAYMENT

Consignment Open Account Cash in Advance Documentary Draft

Documents Against Payment(D/P) Documents Against Acceptance(D/A)

Letter of Credit

2

Methods of PaymentsMethods of Payments

In the order of preference by importers

1. Consignment

2. Open account

3. Time draft (D/A)

4. Sight draft (D/P)

5. Letter of credit

6. Cash in advance

3

Consignment

Buyer has no obligation to pay until sales are made and money is collected.

Surplus inventory or by-product of no or low value

4

Open AccountOpen Account Seller sends goods to buyer with a future

payment date based on his trust in buyer. Buyer has obligation to pay seller on due date but it is not backed by a collateral or a letter of credit.

Between well established importers and exporters, family members , main office and its branches.

Certain governments may not allow export on open account

Usually banks are not involved in international trade done under an open account

5

Cash In Advance

Buyer pays in advance and waits for shipments.

Worst term for importer. Buyers normally do not pay in advance

International market is buyer's market. Very little business

6

Documentary DraftDocumentary Draft Draft accompanied by shipping

documents Draft (Bill of Exchange) is written

demand for payment Draft is used as payment tool and Bank

as intermediary between importer and exporter

7

Document Against Payment (D/P): Sight Draft

1. Exporter sends shipping documents

to his bank

2. Exporter's bank relays them to importer's bank.

3. Importer's bank releases them only against payment by importer

4. If payment is refused by importer, bank has no obligation to pay.

5. Exporter usually buys export credit insurance against importer’s nonpayment

8

Document Against Document Against Acceptance (D/A): Time DraftAcceptance (D/A): Time Draft

1. Exporter sends shipping documents to his bank.

2. Exporter's bank relays them to importer's bank.

3. Importer's bank requests importer to accept the draft.

4. Importer's bank releases shipping documents upon acceptance of draft by importer.

5. Importer pays exporter through banks on future due date.

9

Document Against Document Against Acceptance (D/A): Time DraftAcceptance (D/A): Time Draft

6. Acceptance of draft is importer's promise to pay on due date by marking "ACCEPTED", signing and dating.

7. Exporter usually buys export credit insurance against importer’s nonpayment.

10

Terminologies of Documentary Terminologies of Documentary DraftDraft

Drawer-Seller Drawee-Buyer Payer-Buyer Payee-Seller or his Bank Tenor: A term of a draft: 30, 60, 90 days Protest: Notice of nonacceptance or

nonpayment Bank's acceptance: A draft accepted by a Bank Collection instructions: Given by the seller

11

Letter of CreditLetter of Credit

Uniform Customs and Practice(UCP) for Documentary Credit, Publication No.

600 (2007 revision) by International Chamber of Commerce (ICC)

12

Why a Letter of Credit ?Why a Letter of Credit ? Exporter will not ship without assurance

of being paid for goods he ships. Importer will not pay without assurance of

receiving goods he has ordered. L/C is importer's bank's conditional

guarantee of payment for goods exporter ships.

Exporter gets paid upon presentation of shipping documents and meeting all conditions stipulated in the L/C. He doesn't have to wait for merchandise to reach importer and to be accepted by him.

13

Why a Letter of Credit ?Why a Letter of Credit ? Importer gets assurance of receiving

goods by paying through his bank only against shipping documents bearing title to goods.

Payment is made by importer's bank against shipping documents after shipment but before importer receives goods, as long as shipping documents are in order.

14

Parties of a Letter of CreditParties of a Letter of Credit Opener, Applicant, Accountee: Importer Issuing bank, Opening bank: Bank that issues an

L/C

Beneficiary: Exporter

Advising bank: Bank which receives an L/C, authenticates it, and advises (notifies) it to the beneficiary

Nominated bank: Bank designated by issuing bank for negotiation

– Negotiation means the purchase by bank of drafts and shipping documents under a complying presentation

Parties of a Letter of CreditParties of a Letter of Credit Negotiating bank: Bank that receives

shipping documents from beneficiary and negotiate them.

– Nominated bank or any bank if no nominated bank

Confirming bank: Bank that adds its confirmation to an L/C by adding its undertaking (guarantee) in addition to that of issuing bank

Drawer, payee, shipper: Exporter Drawee, payer: Importer's bank (Issuing bank)

15

16

Sequence of a Letter of Sequence of a Letter of CreditCredit

1. Importer submits Application for Letter of Credit to his bank.

2. Importer's bank opens (issues) L/C

3. Importer's bank (Issuing bank) sends L/C to its correspondent bank (advising bank) in exporter's country to advise it to exporter.

4. Advising bank advises opening of L/C and relays it to beneficiary. Advising bank may "confirm" L/C if requested by opening bank.

5. Upon shipment, exporter prepares or obtains shipping documents.

6. Exporter presents shipping documents to his bank (nominated or negotiating bank) for negotiation.

17

Sequence of a Letter of Sequence of a Letter of CreditCredit

7. Negotiating bank examines shipping documents and if it finds no discrepancy, it send the same documents to opening bank, and requests immediate payment from opening bank or reimbursement bank designated in the L/C

8. Negotiating bank may pay the exporter first and get reimbursed later or pay the exporter after receiving the remittance from reimbursing bank or opening bank.

9. Importer pays issuing bank or arranges a Trust Receipt (T/R) loan and obtain shipping documents from the issuing bank.

10. Importer gives shipping documents to his customs broker for customs clearance.

18

Time to Examine DocumentsTime to Examine Documents

Negotiating bank, confirming bank and Negotiating bank, confirming bank and issuing bank each shall be given a issuing bank each shall be given a reasonable time to examine the reasonable time to examine the documents, but no more than 5 banking documents, but no more than 5 banking days after receipt of documentsdays after receipt of documents

19

Loss of Interest or any Loss of Interest or any ExpenseExpense

Issuing bank is responsible to the Issuing bank is responsible to the claiming bank (negotiating bank) for any claiming bank (negotiating bank) for any loss of interest or any expense occurred, loss of interest or any expense occurred, if reimbursement is not provided on first if reimbursement is not provided on first demand.demand.

20

Types of a Letter of CreditTypes of a Letter of Credit

Irrevocable letter of credit Confirmed letter of credit Transferable letter of credit Red clause Letter of credit Revolving Letter of credit Back to Back Letter of credit Sight Letter of Credit Usance Letter of Credit

21

Irrevocable Letter of CreditIrrevocable Letter of Credit

Letter of Credit is irrevocable even if there is no indication to that effect.

Binds issuing bank to pay once stipulated documents are presented and all terms & conditions of the credit are met.

Credit cannot be amended or canceled without agreement by Issuing Bank, Confirming Bank, if any, and Beneficiary

22

Confirmed Letter of CreditConfirmed Letter of Credit

L/C confirmed by another bank at the request of issuing bank

Usually used when issuing bank or its country is considered not strong enough

Confirming bank adds its confirmation to pay to that of issuing bank. Double guarantee of payment

Advising bank can be confirming bank by adding a sentence, ”We confirm this Letter of Credit.” in the advising Letter of Credit.

23

Transferable Letter of CreditTransferable Letter of Credit Letter of Credit that specifically states “The L/C

is transferable“ Can be transferred in whole or part to another

party or parties (2nd beneficiaries) at the request of 1st beneficiary

Can be transferred only once. The 2nd beneficiary (ies) cannot transfer it again

Can be transferred only on the same terms and conditions except for

the amount of the credit, any unit price stated therein, the latest shipment date or given period for shipment the period for presentation, the expiry date, any or all of which may be reduced or

curtailed, and percentage of insurance cover which may be

increased

24

Transferable Letter of CreditTransferable Letter of Credit Exporter receives a firm offer (quotation) from

a manufacturer in Chicago for 2 sets of printing machine at $45,000, CIF Hong Kong. Total amount $90,000

Exporter offers Importer $50,000 each, CIF Hong Kong and total amount $100,000

Importer opens a transferable letter of credit in favor of Exporter. Documents required. Commercial Invoice Packing list On board Ocean Bill of Lading Marine insurance certificate or policy

25

Transferable Letter of CreditTransferable Letter of Credit Importer’s L/C (Transferable L/C)– $100,000 for 2 sets of printing machine at $50,000

each, CIF Hong Kong– Latest shipment date: October 30, 20XX– Period of presentation: 15 days after shipment– Expiry date: November 15, 20XX– Marine Insurance cover: 110% of CIF value,

$110,000 Exporter’s L/C (Transferred L/C) to

Manufacturer in Chicago– $90,000 at $45,000 each, CIF Hong Kong– Latest shipment date: October 25, 20XX– Period of presentation: 10 days after shipment– Expiry date: November 5, 20XX– Marine insurance coverage: 122.23% of CIF value

26

Transferable Letter of CreditTransferable Letter of Credit First beneficiary has right to substitute his

own draft and invoice for those of 2nd beneficiary

If 1st beneficiary fails to provide required documents on first demand or provides documents with discrepancies & fail to correct them, transferring bank has the right to present to issuing bank the 2nd beneficiary’s documents without any obligation to the 1st beneficiary

Presentation of documents by a 2nd beneficiary must be made to transferring bank.

27

Red Clause Letter of Red Clause Letter of CreditCredit

In general, payments under the L/C are made against shipping documents after shipment.

An L/C which contains a clause allowing advance payments to beneficiary prior to shipment against his clean draft or receipt.

Used to be written in red Partial financing by importer to help

exporter’s operations

28

Revolving Letter of CreditRevolving Letter of Credit

Automatically reinstated when amount of L/C is exhausted.

Useful for repeated shipments

29

Back to Back Letter of Credit Used when original LC is not transferable or

supplier of the goods is not familiar with exporting or wants a different term of payment Supplier wants payments upon shipment from his place

or delivery to the place designated by exporter such as payments against the Dock Receipt

Beneficiary of original L/C (First L/C or Master L/C) pledges his L/C to his bank as collateral to open a second L/C (Back to back L/C)

Beneficiary’s bank opens a separate L/C to the supplier of the beneficiary of the 1st L/C

Even if first L/C defaults, back-to-back L/C remained bound for payment

Riskier to the Bank than transferable L/C

30

Back to Back Letter of CreditBack to Back Letter of Credit Importer’s L/C

– $100,000 for 2 sets of printing machine at $50,000 each, CIF Hong Kong

– Latest shipment date: October 30, 20XX– Period of presentation: 15 days after shipment– Expiry date: November 15, 20XX– Marine Insurance cover: 110% of CIF value, $110,000

• Commercial Invoice• Packing list• On board Ocean Bill of Lading• Marine insurance certificate or policy

Exporter’s L/C to Manufacturer in Chicago– $80,000 at $40,000 each, delivered to Long Beach, CA– Latest delivery date of Dock Receipt: October 15, 20XX– Period of presentation: 10 days after shipment– Expiry date: October 25, 20XX

• Commercial Invoice• Packing List• Dock Receipt

31

Sight Letter of CreditSight Letter of Credit

A Letter of Credit requiring a Draft “At sight” (Sight draft)

A payment is to be made upon presentation but after the bank’s examination of documents presented by the exporter

32

Usance Letter of Credit A Letter of Credit requiring a Draft with a

tenor such as “At 30 days sight.” (Time draft)

When all terms and conditions stipulated in the L/C are met, payment is made at maturity.

Exporter can discount the time draft for immediate cash at the banker’s acceptance rate which is lower than commercial rates. Exporter can increase price by bank interest

amount or have importer insert a clause “the interest is for importer’s account” in the L/C

33

Interpretations of TerminologiesInterpretations of Terminologiesa. Presentation: Delivery of required documents or

documents so delivered.

b. Complying presentation: Presentation complying with the terms & conditions of the credit, its rules and international standard banking practices

c. Honor: - Pay at sight,

- Incur a deferred payment undertaking & pay at maturity

- Accept draft drawn by beneficiary and pay at maturity

d. About or approximately: 10% more or less of amount of LC, quantity or unit price

34

Interpretations of TerminologiesInterpretations of Terminologies

e. 5% tolerance is allowed even if partial shipment not permitted except for quantity in number of packing units or individual items

f. Installments: If skipped, unavailable for subsequent installments

g. “On or about” as to a date: From 5 calendar days before to 5 calendar days after specified date. Use “not later than” in the case of the latest shipment date

h. “To, until, till, from, between”: Include date mentioned. “Before and After”: exclude date

35

Interpretations of TerminologiesInterpretations of Terminologiesi. First half: 1st to 15th, Second half: 16th to end of

month

j. Beginning: 1st to 10th, Middle: 11th to 20th, End: 21st to last day of the month

k. Branches of a bank in different countries: separate banks

l. Commercial invoice must be issued by beneficiary and made out in applicant's name but needs not be signed

m. Description of goods, services or performance in commercial invoice must correspond with that appearing in the L/C. In other documents, in general terms

36

Interpretations of TerminologiesInterpretations of Terminologiesn. Transport documents with "Shipper's load and

count" or “said by shipper to contain” accepted

o. Third party transport documents (consignor or shipper of goods being a party other than beneficiary) accepted

p. Transport documents bearing a reference to charges additional to the freight accepted

q. Expiry date: Documents must be presented on or before it

r. Extension of expiry date: If it falls on a day closed for reasons other than Force Majeure, it will be extended to the first following banking day. Latest shipment date not extended as a result of expiry date extension.

37

Interpretations of TerminologiesInterpretations of Terminologiess. Force Majeure:

No liability or responsibility to a bank for consequences of force majeure: Act of God, riots, civil commotions, insurrections, wars, acts of terrorism, strikes or lockout or any other causes beyond its control

A bank will not, upon resumption of business, honor or negotiate under a credit that expired during such interruption of its business

t. Presentation period/date: Within specified period of time after shipment date. If not stipulated in L/C, within 21 days

u. Transport documents indicating defective condition of goods or packages (Four B/L) not accepted

38

Interpretations of Terminologies

v. A bank must examine a presentation to determine, on the basis of the documents alone, whether or not documents appear on their face to constitute a complying presentation within 5 banking days

w. When a bank determines a presentation is not complying,

it may refuse to honor or negotiate It must give a single notice to that effect to the

presenter no later than the close of the 5th banking day of presentation

If a bank fails to act accordingly, it cannot claim that documents do not constitute a complying presentation

39

Interpretations of TerminologiesInterpretations of Terminologiesx. A bank assumes no liability or

responsibility for

the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document,

the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods, services or other performance represented by any document

the good faith or acts or omissions, solvency, performance or standing of the consignor, the carrier, the forwarder, the consignee or the insurer of the goods or any other person

40

Interpretations of TerminologiesInterpretations of Terminologiesy. A bank assumes no liability or responsibility

for delay or loss in transit, mutilation or other

errors in the transmission of messages or delivery of letters or documents.

errors in translation or interpretation of technical terms. A bank may transmit credit terms without translating them.

When a presentation is complying, the issuing bank or confirming bank must honor or negotiate, or reimburse that negotiating bank, even if documents have been lost in transit between banks.

41

DiscrepanciesDiscrepancies

Discrepancy is any inconsistency with the conditions of L/C

When negotiating bank finds discrepancies,

Correct discrepancies if possible If not, have importer accept discrepancies and

amend L/C accordingly. L/C must be amended.

Should not send shipping documents to issuing bank on an approval or collection basis

42

Application for Letter of Application for Letter of CreditCredit

Importer establishes a line of credit with the issuing bank or deposit cash in advance

Importer applies for an L/C based on terms and conditions agreed between importer & exporter

Importer must check with Customs office as to documents necessary for his imports and other government agencies’ requirement such as FDA or USDA

Wise to have one set of documents sent to his customs broker for speedy customs clearance

43

SIGHT DRAFT (BILL OF SIGHT DRAFT (BILL OF EXCHANGE)EXCHANGE)

Sight Draft(Bill of Exchange)

No._________ BILL OF EXCHANGE Date______________ At (1) xxxxxxxx SIGHT OF THIS ORIGI NAL OF EXCHANGE (DUPLI CATE UNPAID)

PAY TO THE ORDER OF (2)________________________ U.S. $ (3)________

THE SUM OF (4)______________________________________________U.S.Dollars

 

To (8) __________________________ (9)_____________________________ ___________________________

(1) Number of Days ( 2) Name of Negotiating Bank (3) Dollar Amount in Figures (4) Dollar Amount in Words (5) Letter of Credit Number ( 6) Date of the Letter of Credit (7) Name of L/C Issuing Bank (8) Name of Paying Bank (9) Name & Signature of Beneficiary

 

DRAWN UNDER LETTER OF CRED IT NO. (5)

DATED

(6)

ISSUED BY

(7)

44

Time Draft (Bill of Exchange )Time Draft (Bill of Exchange )

Time Draft (Bill of Exchange )

No.___________ BILL OF EXCHANGE Date: _____________

At (1) 30 Days SIGHT OF THIS ORIGINAL OF EXCHANGE (DUPLICATE UNPAID)

PAY TO THE ORDER OF _______________________________ U.S. $________

THE SUM OF___________________________________________U.S. Dollars

 

To __________________________ _____________________________ ___________________________

(1) It can be 60 days, 90 days, 120 days, 180 days or longer depending on the agreement between the exporter and the importer.

 

DRAWN UNDER LET TER OF CRED IT NO. (5)

DATED

(6)

ISSUED BY

(7)

45

TYPICAL LETTER OF CREDIT TYPICAL LETTER OF CREDIT TRANSACTIONTRANSACTION

(6) M (7)

(2) (5) (1) (10)

(3) (9)

(8) (4)

Advising/ Negotiating

Bank

Exporter

Issuing (Opening)

Bank

Importer