TERMS AND METHODS OF PAYMENT IN FOREIGN TRADE

To begin speaking on this topic I’d like to start				To carry on this topic it is logically now to speak
with the risks which are faced by both sides –				about the methods of payment in cash. There are
exporters and importers – in an export				different methods:
transaction. This is because there is always the				1. By cheque that is a special printed form that is
possibility that the other side may not fulfill the				filled in and signed by a person, the drawer of a
contract.				cheque asking the bank, the drawee, to pay a sum
The risks for the exporters are the following:				of money to someone, the payee. Cheques are
1. the risk of buyer default				payable in the country of origin and it is practicable to
2. the customers might not pay in full for the goods:				use them in home trade in order to avoid wasting
(this risk may be caused by several reasons)				time. There are different kinds of cheques used:
- the importers might go bankrupt				- Blank
- a war might start				cheque: a cheque that is signed but without the
- importers’ government might				amount of money written in, this is added later by
decide to ban trade with the exporting country				the person to whom the cheque is paid when the
- importers’ government might				amount is known;
decide to ban imports of certain commodities				- Certified
1. the importers might run into difficulties getting the				cheque: a cheque marked by the bank it is drawn on
foreign exchange to pay for the goods				as ‘Good for payment’, meaning that a
2. the importers are not reliable & simply refuse				cheque is true and genuine;
to pay the agreed amount of money				- Crossed
And the risks for importers are:				cheque: a cheque that has two lines drawn across it
1. the goods will be delayed & they will only				to show that it can only be paid into bank account
receive them a long time after paying for them,				and not exchanged for cash;
because of:				- Open
- port congestion				cheque: a cheque that does not have two lines
- port strikes				drawn across it and can therefore be exchanged for
1. delays in fulfillment of orders by exporters &				cash at the bank where it was issued;
difficult Customs clearance in the importing country				-
can cause loss of business				Traveler’s cheque: a cheque for a fixed amount,
2. the wrong goods might be send				sold by a bank, that can easily be cashed in foreign
But all these risks can be reduced with the help of				countries.
the banks, which provide several services which give				- Stale
security to exporters and importers.				cheque: a cheque that is not presented to a bank for
- the risk of buyer default or non-delivery by				payment within six months of being written; it will not
exporters is removed by the method of payment				be exchanged for money by the bank and will be
against shipping documents.				returned, marked ‘out of date’;
- exporters’ banks provide information about the				- Stopped
financial reliability of their customers				cheque: a cheque that the person who signed it has
- banks help arrange buyer credit or finance for the				asked a bank not to pay; if such a cheque is paid,
sellers (without this a lot of trade would not take				the bank must bear the loss;
place at all)				2. By telegraphic or telex transfers or post (mail)
- the risks of financial lost because of a change in				remittance which is made from the Buyers’ bank
exchange rate can be avoided with the help of a				account to the Sellers’ in accordance with the
bank, by buying the foreign exchange on the				Buyers’ letter of instruction. Actually this method
forward exchange market				of cash payment may sometimes take several
So we must admit that the terms of payment are				months, which is naturally very disadvantageous to
an integral part of contract in international trade.				the Sellers.
There are different methods of payment in foreign				3. By bank cables or electronic transfers which is
trade: in cash and on credit ( & in advance –				relatively quick way of sending money to someone
according to Kotlyarov).				abroad. The sender’s bank cables the money (i.e.
Now I’d like to speak about the methods of				sends an instruction for it to be paid) to the bank of
payment on credit, because most modern business is				the receiver. The money should be paid in the
done on a credit basis which may be:				receiver’s currency at the rate of exchange. The
1) by drafts (by Bills of Exchange – B/E), which is				sum of money can either be credited to the
the most popular terms of payment on credit. A Bill				receiver’s account or paid in cash against the
of Exchange is a signed documents, such as a				identification.
cheque, that orders a person or an organization, such				4. By letter of credit (L/C) (or just by credit) – a
as a bank, to pay a fixed sum of money on demand				letter from one bank to another, by which the third
or on certain date to the person specified. It is a				party, usually a customer, is able to obtain money.
document that can be exchanged for goods, money,				There are different types of L/C:
i.e. it is a negotiable instrument like cheques or				- circular – a L/C which is addressed to all
banknotes and can be a subject of the deal.				branches, correspondents & agents to the
There are various types of bills of exchange:				issuing bank
- accommodation B/E: a bill that is signed by someone				- direct – a L/C which is the issuing bank
who promises to pay it to help another person to				addresses to one particular branch (as opposed to a
raise money. A person signing the accommodation bill				circular)
is called the accommodation party, i.e. a person with				- confirmed – a L/C to which the paying bank
a good financial reputation who signs a bill to make it				has added its guarantee that payment will be made
easier to exchange; sometimes accommodation bills				against presentation of certain documents
are called ‘kites’, ‘windbills’ or				- unconfirmed – a L/C which the issuing bank
‘windmills’.				gives no promise that it will accept bills drawn upon it
- Discounted B/E: bill bought at a reduced price				- documentary – a L/C to which a number of
before it is due for payment;				other documents such as Bill of Lading, an Insurance
- Documentary B/E: a bill attached to shipping				Certificate etc. have been joined by the exporter to
documents such as bills of lading, invoices, etc.;				obtain payment from the bank
- Documents-against-acceptance B/E [D/A, D/A bill]: a				- irrevocable – a L/C that can only be
bill sent by an exporter with other shipping				cancelled or changed with the agreement of the
documents to an agent who will not release the				person expecting payment
documents until the bill of exchange has been signed				- limited – a circular L/C which can only be
(accepted) by the person receiving the goods; this is				used in certain number of places
used when the bill of exchange is a period bill and				- traveler’s – a document issued by a
must be paid by a specified date;				bank to a traveler whereby the traveler may receive
- Document-against-payments B/E				money up to a stated amount from all the
[cash-against-documents]: a bill sent by an exporter				bank’s agents abroad, when the traveler’s L
with other shipping documents to an agent who will				C is used up it should be sent back to the issuing
not release the documents until the bill has been				bank
signed (accepted) by the person receiving the goods;				- revolving – a L/C under which its value is
this is used when the bill of exchange is a sight bill				constantly made up to a given limit after payment
and must be paid immediately;				for each shipment, which saves the charges on
- Endorsed B/E: a bill signed on the back, that makes				multiply L/C
it payable to someone else.				Thus, a confirmed irrevocable L/C guarantees the
There are also some more kinds of B/E such as				payment for the goods being exported. Besides, all L
foreign B/E (payable in another country), inland B/E (				C can be valid within a stipulated period of time, after
payable in the country where it was drawn up),				the expiry of which the payments can be made only
period/term B/E, short B/E , sight B/E , time B/E,				with the consent of the parties concerned. A L/C is
trade B/E.				safe in business transaction as it provides for the
In terms of time of payment there are different				payment to be effected only against shipping
conditions on which the bills of exchange can be				documents: Invoice, Bill of Lading, a copy of the
drawn up:				Waybill, shipping certification, packing sheet,
- On demand: a bill of exchange must be paid				Certificate of Quality, Certificate of Origin, Insurance
immediately as it is presented for payment;				Policy Certificate.
- At sight: an inscription made by a drawer on a bill of				5. For collection. It doesn’t give any advantages
exchange to show that it must be paid as soon as it				to the Exporter because it doesn’t give any
is presented for payment;				guarantee that he will receive payment in time or at
- After sight: an inscription made by a drawer on a bill				all. That’s why the Exporter usually requires that
of exchange to show that the bill would be paid				the Importer presents a guarantee of a first class
within a specified time after the payer (the drawee)				bank that payment will be effected in due time. Also,
is presented with it;				there is a long period of time between the delivery
- After date: an inscription made by a drawer on a bill				of goods & actual payment. But it is
of exchange to show that payment will be made at				advantageous to the Importer because there is no
a specified time after the date given on the bill; such				need to withdraw from circulation bug sums of
bills are called after-date bills.				money before actually receiving goods.
There are two main persons, working with the bill of				Payment for collection against documents (with
exchange: The drawer is a person who writes a				subsequent acceptance or very often telegraphic
cheque/ a bank order/ a bill of exchange, etc. and				collection with subsequent acceptance) is mostly
therefore instructs a drawee to make a payment				used in trade with East European countries. The
within a stipulated period of time.				costs involved in effecting payment for collection are
The drawee is a person on whom a cheque/ a bank				twice or three timed lower than those by L/C.
order/ a bill of exchange have been drawn up, the				So, to speak more wide on this topic, it would be
payer. The drawee must accept the cheque/ bill/				reasonable to mention the important role of the
bank order and pay it within the stipulated period of				shipping documentation.
time.				Shipping documents are certain documents which are
Special attention needs to be drawn to the				under the system known as documents for collection
endorsement of bills of exchange. Endorsement is a				are sent by an exporter’s bank to the
signature on the back of a bill of exchange or cheque				bank’s branch or agent in the importer’s
by the payee (beneficiary), making it payable to				country who delivers them to the importer when he
another person. There are various types of				pays or excepts a Bill of Exchange.
endorsements used in business transactions:				The shipping documents consist of:
- Accommodation endorsement: the name and				1. Invoice – is a document contains complete
signature written on the back of an accepted bill of				details of the order, the terms of shipment and
exchange as a guarantee that payment will be made				payment, the value of the order & details of
on the date given;				insurance.
- Blank endorsement: a signature on a bill of exchange				2. Origin Bill of Lading (or a copy of rail or road
or cheque, by the payee, making it payable to any				waybill) – is a document of title goods which
other person, i.e. to a bearer;				have been loaded on the ship.
- Restrictive endorsement: a signature on a bill of				3. Shipping specification – is the form which gives
exchange or cheque, by the payee, making it payable				details of goods which being shipped
only to a named person or account; it is no longer a				4. Packing Sheet – shows that the goods have
negotiable instrument;				been tested.
- Special endorsement: a signature on a bill of				5. Certificate of Quality – shows that
exchange or cheque, by the payee, making it payable				commodities have passed the task of grading.
to another person, i.e. to order.				6. Certificate of Origin – shows where the goods
2) Another method of payment on credit is in				come from.
advance (the Importer credits the Exporter, for				7. Insurance Policy/ Certificate.
example, the contract may stipulate a 10 or 15%				There are three basic methods of payment in foreign
advance payment, which is advantageous to the				trade but traders usually use the one which is
Sellers). This method is used when the Buyers are				customary in their business.
unknown to the Sellers or in the case of a single				1. Payment against documents. The shipping
isolated transaction or as part of combination of				documents are exchanged with the bank
methods in a large-scale (transaction) contract.				representing the importers. There are two
3) The third method of payment on credit is on an				procedures: Documentary Bills and Documentary
open account. Open account terms are usually				Letters of Credit. The latter is the commonest
granted by the Sellers to the regular Buyers or				method of payment.
customers in whom the Sellers have complete				2. Payment into an open account. This is used where
confidence, but sometimes they are granted when				there is complete trust between seller and buyer.
the Sellers want to attract new Buyers then they				Also there must be no political or currency problems.
risk their money for that end. Actual payment is				The exporters simply airmail the shipping documents
made monthly, quarterly or annually as agreed upon.				to the importers who settle their account monthly or
This method is disadvantageous to the Exporter, but				quarterly.
may be good to gain new markets.				3. Cash in advance. This is used only for small orders
4) And the last method of payment on credit is a				sent by parcel post.
Promissory Note, which is a document in which a				Whatever method is used, the Sellers have to check
person or an organization, such as a bank, promises				the credit status (financial strength) of the Buyers.
(on behalf of the Buyers) to pay a fixed sum of				The criteria, forming relevant method of payment is
money on demand or by a certain date, to the				the stage of economic development of the countries,
person specified (the Sellers).				between which the payment is settling up.

Global Trade

TERMS AND METHODS OF PAYMENT IN FOREIGN TRADE