Lecture 4 Terms of payment

Lecture 4 Terms of payment • Payment • Urging establishment of L/C • L/C amendment and extension

Payment • Modes of payment • remittance 汇付 • collection 托收 • letter of credit 信用证

Payment --- remittance • Remittance （汇付） • Remittance is to deliver the payment of the goods to the seller by bank transfer. In remittance, there are four parties involved: the remitter(汇款人), the beneficiary(受益人), the remitting bank(汇出行, 寄单行) and the paying bank(付款银行).

Types of remittance (a) mail transfer(M/T), 信汇 The buyer will hand over the payment of the goods to the remitting bank that will authorize its branch bank or correspondent bank（代理行, 往来行, 通知行） in the country of the beneficiary by mail to make payment to him. (b)telegraphic transfer(T/T), 电汇 The buyer will hand over the payment of the goods to the remitting bank which will authorize its branch bank or correspondent bank in the country of the beneficiary by telegraphic means to made the payment to him. Mail transfer is cheap but time-consuming, while telegraphic transfer is more expensive but much faster. (c)demand draft(D/D), 票汇 The buyer will come to the local bank to buy a banker’s bill and then deliver it to the seller or beneficiary by mail. When the seller or beneficiary receives it, he will take the money from the relative bank in his place.

Payment --- collection Under collection, the exporter takes the initiative to collect the payment from the buyer. Upon the delivery of the goods, the exporter draws a bill of exchange(汇票) on the importer for the sum due, with or without relevant shipping documents attached, and authorizes his bank to effect the collection of the payment through its branch bank or correspondent bank in the country of importer. parties involved in collection: (a) The Principal (exporter or seller) 出票人 (b) The remitting bank (A bank at the place of the seller) 托收行 (c) The collecting bank (correspondent or branch of the remitting bank) 代收行 (d) Drawee (buyer or importer) 受票人

Types of collection: • 1. Document against payment (D/P)付款交单:it calls for actual payment against transfer of shipment documents. • D/P at sight（即期付款交单）: it requires immediate payment by the importer to get hold of the documents. • D/P after sight （远期付款交单）: the importer is given a certain period to make payment as 30, 45, 60, or 90 days after presentation of the documents, but he is not allowed to get hold of the documents until he pays. • 2. Document against acceptance(D/A)承兑交单: the documents representing the title to the goods will be released to the buyer once the buyer has accepted the draft（汇票）drawn by the seller and promises to pay 60/90/… days after sight. D/A is always after sight.

As we can see, neither remittance nor collection is a safe means for the settlement of payment in international trade as both of them rely on commercial credit. With the development of international trade, bank credit gets involved in the settlement of payment which provides it with more secure means. L/C is the major means thus developed and is now most often used in the settlement of payment in international trade.

Issuing Bank The terms of L/C Applicant Beneficiary Payment --- L/C • In international trade practice, an L/C can be seen as a document by which a bank, upon the request of an importer, promises to effect the payment of the goods to the exporter.

Procedures of trade by an L/C • The buyer and the seller conclude a sales contract • The buyer instructs his (issuing) bank to issue a credit in favor of the seller • The issuing bank asks another bank to advise or confirm the credit • The advising bank informs the seller • The seller receives the credit and load the goods and dispatch • The seller sends the documents to the paying/negotiating/accepting bank(承兑行 ) • The bank checks the documents against the credit and decide whether to pay • The bank, if other than the issuing bank, sends the documents to the issuing bank • The issuing bank checks the documents and effects payment • The issuing bank releases the documents to the buyer upon payment of the amount due • The buyer sends the transport document to the carrier and gets the goods

Parties Involved in L/C • The applicant, who is usually the importer that applies to the bank for the L/C. • Issuing bank, which opens the L/C upon the request of the importer. • Advising bank, or notifying bank, which is authorized by the issuing bank to transfer the L/C to the exporter’s bank. • Beneficiary, who is usually the exporter and is entitled to use the L/C for the payment of the goods. • Negotiating bank, which is willing to buy on discount the documentary draft drawn by the beneficiary.(议付银行指买入出口人交来的跟单汇票并将汇票和单据寄送进口地开证行以索回款项的银行。通常通知行也就是议付行。 ) • Paying bank, which is designated by the L/C to pay the draft. • Confirming bank, which is asked by the issuing bank to confirm the L/C. If a bank has confirmed the L/C, it holds itself responsible for the negotiation or payment of the L/C.

Types of L/C • 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

Confirmed L/C vs. unconfirmed L/C • A confirmed L/C has the commitment of the confirming bank besides that of the issuing bank’s commitment. • An unconfirmed L/C contains the commitment of the issuing bank only.

Useful Expressions • 1. Our terms of payment are by a confirmed irrevocable letter of credit by draft at sight. • 2. Since the total amount is so big and the world monetary market is rather unstable at the moment, we can not accept any terms of payment other than a Letter of Credit. • 3. In order to conclude the business, I hope you’ll meet me half way. What about 50% by L/C and the balance by D/P (document against payment,付款交单）?

4. For such a large amount, an L/C is costly. Besides, it ties up my money. All this adds to my cost. • 5. I’d like to discuss the terms of payment with you. I wonder if you would accept D/P. • 6. We have instructed our bank to open an irrevocable letter of credit in your favor. The amount is $ 1,300.00. • 7. We shall draw on you at 60 days sight after the goods have been shipped. Please honor our draft when it falls due.

8. The bank has just advised us that our Draft No.2 was declined (rejected, refused).

Dialogue • W: Well, we’ve settled the question of price, quality and quantity. Now what about the terms of payment?B: We only accept payment by irrevocable letter of credit payable against shipping documents.W: I see. Could you make an exception and accept D/A or D/P?B: I’m afraid not. We insist on a letter of credit.W: To tell you the truth, a letter of credit would increase the cost of my import. When I open a letter of credit with a bank, I have to pay a deposit. That’ll tie up my money and increase my cost.B: Consult your bank and see if they will reduce the required deposit to a minimum.

Drills • 1 A: What are your terms of payment? How are we going to arrange payment? What is the mode of payment?B: We want payment to be made by confirmed, irrevocable L/C. You’ll need to open a confirmed and irrevocable letter of credit. We’d like you to pay us by confirmed and irrevocable letter of credit.

2 A: The point is that to open a L/C does mean additional expense. The trouble is that opening a L/C will add to the cost of our imports.B: I’m sorry that can’t be helped.

3 A: How long should our L/C be valid?When should we set the expiry date?What should be the validity of the L/C?B: The L/C should be valid for 15 days after the date of shipment.The expiry date of the L/C is to be 15 days after the date of shipment.The L/C must remain valid until the fifteenth day after shipment.

4 A: Payment by L/C is quite usual in international trade. our usual practice. customary in foreign trade.B: I know. L/C is all right, but could you consider 60 days’ sight draft? be more flexible for future dealings？make your payment terms easier for us just for this small order？

A Specimen Letter • Dear sirs：We have received your letter of December 20th and noted with interest your intention of pushing the sale of our automobiles in your country.Although we are much appreciative of your efforts to help sell our automobiles, we regret being unable to consider your request for payment by D/A 60 days’ sight. Our usual practice is to ask for sight L/C.However, in order to facilitate developing the sale of automobiles in your market, we are prepared to accept payment by D/P at sight as a special accommodation.We hope that the above payment terms will be acceptable to you and look forward to the pleasure of hearing from you soon.Yours faithfully,Manager

Urging establishment of L/C • It is the usual practice that the L/C is to be established and to reach the seller one month prior to the date of shipment so as to give the seller enough time to make preparations for shipment. • However, there may be circumstances where the buyer fails to establish the L/C, or the L/C does not reach the seller in time. • Then a letter, usually a telex or a FAX, has to be sent to the buyer to urge him to expedite the L/C or to find out its whereabouts

The first message sent should be a polite note saying that the goods ordered are ready but the relevant letter of credit has not yet come to hand. • If the first message brings no reply, a second one will be sent. This one will express disappointment and surprise, though still refrained.

A specimen letter • May 8, 19.. Dear Sirs, We wish to inform you that the goods under S/C No.1234 have been ready for some time, and moreover, according to the provisions in the sales confirmation, shipment is to be made in June 19... We sent a telex fortnight ago, asking you to expedite the establishment of the relevant L/C. It was anticipated that the L/C would have reached us by now. However, much to our disappointment, we have not been given a reply, nor have we received your L/C up to the time of writing. We are at a loss to understand what has happened at your end.

As the time of shipment is drawing near, we cannot but point out that unless your L/C comes into our possession before May 31, 19.., we shall not be able to effect shipment within the stipulated time limit and in the meantime shall hold you responsible for any loss. • Last but not least, we wish to stress the point that care should be taken not to incorporate in your L/C any clause that is at variance with the terms set forth in the Sales Confirmation. We are awaiting your information by telex about L/C position. Yours faithfully,

L/C amendment and extension • For various reasons, the seller may ask for amendments to an L/C. in this case, the seller should send a message to the buyer, asking him to instruct the issuing bank to make amendments. • Sometimes, the buyer may also ask for amendments to the L/C. in this case, the buyer should first obtain the consent from the seller, and then instructs the issuing bank to amend the L/C. • Sometimes, the seller may also ask for the extension of the expiry date as well as the the date of shipment of the L/C.

Letters concerning L/C amendment and extension should be written with courtesy, because a mere amendment to or extension of L/C will need time and money, which is always an annoying thing to the buyer. • In practice, the request for L/C amendment and/or extension is generally made by telex or FAX.

Asking for Extension of L/C • Dear sirs, • L/C No. NSW6180 • We confirm our cable of yesterday, reading as follows: • L/C NSW6180 TIN PLATE(马口铁) ARRIVED ONLY TODAY JULY SHIPMENT IMPOSSIBLE EXTEND SHIPMENT VALIDITY 31/8 15/9 RESPECTIVELY • We trust that you have received the above cable and are doing what is necessary.

As stipulated in S/C 89STX-5491,shipment could be made in July provided your L/C reached us not later than 15th. However, we received your L/C only yesterday and it is absolutely impossible for us to ship the goods in July. • Under the circumstances, we regret to have to have to ask you to extend the above L/C to August 31st and September 15th for shipment and negotiation respectively, with the amendment to reach us by the 15th July; otherwise shipment will be further postponed. • We look forward to receiving the relevant amendment at an early date and thank you in advance. • Yours faithfully,

Lecture 4 Terms of payment