CHAPTER IX
TERMS OF PAYMENT
 Consignment
 Open Account
 Cash in Advance
 Documentary Draft
 Documents Against Payment(D/P)
 Documents Against Acceptance(D/A)
 Letter of Credit
1
Methods of Payments
In the order of preference by importers
1.
2.
3.
4.
5.
6.
Consignment
Open account
Time draft (D/A)
Sight draft (D/P)
Letter of credit
Cash in advance
2
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
3
Open 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
4
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
5
Documentary 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
6
Document Against Payment
(D/P): Sight Draft
1.
2.
3.
4.
5.
Exporter sends shipping documents
to his bank
Exporter's bank relays them to importer's bank.
Importer's bank releases them only against
payment by importer
If payment is refused by importer, bank has no
obligation to pay.
Exporter usually buys export credit insurance
against importer’s nonpayment
7
Document Against Acceptance
(D/A): Time Draft
1.
2.
3.
4.
5.
Exporter sends shipping documents to his
bank.
Exporter's bank relays them to importer's bank.
Importer's bank requests importer to accept the
draft.
Importer's bank releases shipping documents
upon acceptance of draft by importer.
Importer pays exporter through banks on future
due date.
8
Document Against Acceptance
(D/A): Time Draft
6.
7.
Acceptance of draft is importer's promise to
pay on due date by marking "ACCEPTED",
signing and dating.
Exporter usually buys export credit insurance
against importer’s nonpayment.
9
Terminologies of Documentary Draft








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
10
Letter of Credit

Uniform Customs and Practice(UCP) for
Documentary Credit, Publication No.
600 (2007 revision) by International
Chamber of Commerce (ICC)
11
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.
12
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.
13
Parties 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
14
Parties 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
Sequence of a Letter of Credit
1.
2.
3.
4.
5.
6.
Importer submits Application for Letter of Credit
to his bank.
Importer's bank opens (issues) L/C
Importer's bank (Issuing bank) sends L/C to its
correspondent bank (advising bank) in
exporter's country to advise it to exporter.
Advising bank advises opening of L/C and relays
it to beneficiary. Advising bank may "confirm"
L/C if requested by opening bank.
Upon shipment, exporter prepares or obtains
shipping documents.
Exporter presents shipping documents to his
bank (nominated or negotiating bank) for
negotiation.
16
Sequence of a Letter of Credit
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.
7.
17
Time to Examine Documents
 Negotiating bank, confirming bank and
issuing bank each shall be given a
reasonable time to examine the
documents, but no more than 5 banking
days after receipt of documents
18
Loss of Interest or any Expense
 Issuing bank is responsible to the
claiming bank (negotiating bank) for any
loss of interest or any expense occurred,
if reimbursement is not provided on first
demand.
19
Types 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
20
Irrevocable 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
21
Confirmed 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.
22
Transferable 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
23
Transferable 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
24
Transferable 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
25
Transferable 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.
26
Red Clause Letter of Credit




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
27
Revolving Letter of Credit
 Automatically reinstated when amount of
L/C is exhausted.
 Useful for repeated shipments
28
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
29
Back 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
30
Sight 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
31
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
32
Interpretations of Terminologies
a.
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
33
Interpretations 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
34
Interpretations of Terminologies
i.
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
35
Interpretations of Terminologies
n.
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.
36
Interpretations of Terminologies
Force Majeure:
s.


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
37
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
38
Interpretations of Terminologies
A bank assumes no liability or
responsibility for
x.



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
39
Interpretations of Terminologies
y.



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.
40
Discrepancies

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
41
Application for Letter of Credit




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
42
SIGHT DRAFT (BILL OF EXCHANGE)
Sight Draft(Bill of Exchange)
No._________
BILL OF EXCHANGE
Date______________
At (1) xxxxxxxx SIGHT OF THIS ORIGINAL OF EXCHANGE (DUPLICATE UNPAID)
PAY TO THE ORDER OF (2)________________________ U.S. $ (3)________
THE SUM OF (4)______________________________________________U.S.Dollars
DRAWN UNDER LETTER
OF CREDIT NO. (5)
DATED
(6)
ISSUED BY
(7)
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
43
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
DRAWN UNDER LETTER
OF CREDIT NO. (5)
To
DATED
(6)
__________________________
___________________________
ISSUED BY
(7)
_____________________________
(1) It can be 60 days, 90 days, 120 days, 180 days or longer depending on the
agreement between the exporter and the importer.
44
TYPICAL LETTER OF CREDIT
TRANSACTION
Advising/
Negotiating
M
Bank
(6)
(7)
Issuing
(Opening)
Bank
(2)
(5)
(1)
(10)
(3)
(8)
Exporter
(9)
(4)
Importer
45