Trade Settlement Methods

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Unit 10. Methods of

International Settlements


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International money transactions refer to

the movement of funds from one country to

another. The main reason for moving funds

from one country to another is the

settlement of debts resulting from

international trade.


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The methods of payment chiefly include remittance,

collection and L/C. If the payment is made by

remittance, it is called favorable exchange (), by

which the buyer makes the payment by bank of his own

accord; if by collection or L/C it is adverse exchange (

), by which the exporter takes the initiative to gather

payment from the buyer. To choose a method for the payment of the goods, you

should consider the credit standing of the buyer.

Different methods of payment mean different credits.

Bank credit () is more reliable thancommercial credit (). So, we should choose

the right method for the safe settlement of the payment.


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I. Remittance


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A. Definition Remittance is to deliver the payment of the goods to the seller by bank transfer. In

remittance, there are four parties involved: the remitter, the beneficiary, the

remitting bank and the paying bank. The remitter remits the money to the beneficiary as it is required by the contract

concluded between them. And when the remitter comes to the remitting bank, he

fills an application form for the bank to effect the payment, which upon remittance

will be binding upon the remitting bank. And the paying bank pays the beneficiary

because it is the branch bank or correspondent bank of the remitting bank in the

country of the seller.

Remittance is mainly used for payment in advance () , open account (

) for small quantity of goods, commission, sundry charges, etc.

(a) If it is used for payment in advance or cash with order, it will place the seller in

an advantageous position.

(b) If for delivery first and payment afterwards, it will place the buyer in a favorable

position.

Note:Remittance uses commercial credit and hence in adopting this method, the

parties involved need have trust in each other.


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II. Collection


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B. Parties Involved in Collection

(a) The Principal (exporter or seller)

(b) The remitting bank (A bank at the place of the seller) (c) The collecting bank (correspondent or branch of the remitting

bank)(d) Drawee (buyer or importer)

(PThis is the person who draws the bill of exchange andauthorizes his bank to effect the collection.)

(R-This is the bank authorized by the drawer of the draft to effectcollection from the buyer. It is usually the bank at the place of theseller.)

(C-This is the bank authorized by the remitting bank to collect thepayment from the drawee, or the buyer of the goods. Usually this isthe bank in the country of the buyer.)

(D-The drawee is usually the buyer of the goods who should makepayments in time.)


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C. Documents Against Payment (D/P)

Under D/P, the buyer can receive the shipping documents only after he has duly

made the payment of the goods. It can be further be of 2 types: D/P at sight andD/P at __ days after sight (date).

D/P at sight. Under D/P at sight, the seller might draw a draft on the buyer. He

hands over the shipping documents together with draft, and the shipping

documents and the draft will be transferred to the collecting bank which present

them to the buyer and ask him to make the payment at sight. The buyer, upon

sight, should then make the payment and obtain the shipping documents. When

the collecting bank has finished the collection, it should immediately notify the

remitting bank, which will then make the payment to the seller.

D/P at __ days after sight (date). Under D/P at __ days after sight (date), the

buyer shall duly accept the documentary draft drawn by seller at __days sight

upon first presentation and make payment on its maturity. The shipping

documents are to be delivered against payment only.


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Note:

Under D/P, the buyer can not obtain the shipping

documents if he does not make the payment, should

this happen, the seller need first negotiate with thebuyer, and at the same time, he may consider if he can

sell the goods to others or to ship the goods back,

usually at his own cost.


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D. Documents Against Acceptance (D/A)

Under the D/A, the buyer can get the shipping documents from

the collecting bank after he has duly accepted the draft. This is

only applicable to time draft. This is greatly convenience to the

buyer, but it means much more risk for the seller, for once he has

delivered the shipping documents, he will have lost his title over

the goods.D/A means more risks for the seller, for the buyer might refuse

to pay after he has accepted the draft and taken the delivery of the

goods. Certainly the seller might sue the buyer, but as is often the

case, the buyer claims bankruptcy and then the seller can donothing to remedy the situation.


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III. Letter of Credit(L/C)


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As we can see, neither remittance nor collection is asafe 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 paymentwhich provides it with more secure means. L/C is the

major means thus developed is now most often used in

the settlement of payment in international trade.


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A. Definition

In international trade practice, a L/C can be seen as a

document by which a bank, upon the request of animporter, promises to effect the payment of the goodsto the exporter.

Function of L/C:

The L/C solves the possible problems arising fromthe distrust between the seller and the buyer. UnderL/C, the seller can feel assured that so long as he hasmade the delivery of the goods and got the required

documents he can get the payment of the goods intime and the buyer can also feel at ease that he can getthe shipping documents at the same time when heeffects the payment of the goods.


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B. 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 exporters bank.

Beneficiary, who is usually the exporter and is entitled to use the L/C forthe payment of the goods.

Negotiating bank, which is willing to buy on discount the documentary

draft drawn by the beneficiary.

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.


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C. The Main Contents of L/C

(a) The parties involved, including the applicant, the issuing bank, negotiatingbank, the paying bank, etc.

(b) Remarks about the L/C: such as the No. of the L/C, its type, the issuing

date, etc. (c) The amount of the L/C

(d) The clauses of the bill of exchange, such as the amount of the bill, drawerand drawee, the paying date, etc.

(e) The clauses about the documents, what documents are required, such as

the invoice, the bill of lading, the insurance policy, the packing list , the certificate of origin, and inspection certificate, etc. Also, the requiredmember of copies of the documents, description of the goods, specifications,quantity, packing, unit price, total amount, mode of transport, place ofunloading, etc.

(f) Particular clauses, such as the special provisions about the deal inaccordance with the particular business or political situations of the importingcountry.

(g) Guarantee clauses of the issuing bank, which testifies that the issuing bankwill hold itself responsible for the payment to the beneficiary or the holder ofthe draft.


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D. Revocable L/C & Irrevocable L/C

Revocable L/C is the one that can be withdrawn or

amended by the issuing bank any time before the negotiation, oracceptance, or payment is effected. In doing so, the issuing bank does not

need to have the agreement or even notify the beneficiary. This is rarely

used in the settlement of payment in international trade.

Irrevocable L/C is the one that cannot be

withdrawn or amended by the opening bank without the agreement of the

beneficiary. This hind of L/C is more secure and hence is most often

used.

We should note that, according to Uniform Customs and Practiceof Commercial Documentary Credits 500, if a L/C is not marked as

being irrevocable, it should be taken as irrevocable.

E Th P d I l d i th U f L/C


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E. The Procedures Involved in the Use of L/C


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Thank you

By

Amps