chapter 6: collection and payment abstract: this chapter mainly introduces the process of...

Chapter 6: Collection and Payment Abstract: this chapter mainly introduces the process of i

nternational settlement, such as means of payment, payment time, payment place, etc. Among them the L/C and its related issues are discussed in great details. This chapter is a key chapter of this book.

Section 1: Instruments of Payment

Section 2: Remittance and Collection

Section 3: Letter of Credit

Section 4: Letter of Guarantee

Section 5: International Factoring

Section 6: The choosing of payment instruments

Section 1: Instruments of Payment

1. Bill of Exchange, DraftDraft is most commonly used method of payment

(1) Definition of Draft

The definition of draft according to “Bill Law of the People's Republic of China”

The definition of draft according to English “Bill of Exchange Act”

(2) Main Contents of Draft

1. Definitely recorded items

2. Relatively recorded items (1) Time limit of payment (If no time limit is specified,

infer it for sight payment) (2) Place of payment (If no place is specified, infer it f

or the payer’s place of business or residence) (3) Place of issue (If no place is specified, infer it for t

he issuer’s place of business or residence) (4) Number(5) Drawn clauseInterest and interest rate

3. Parties to a bill of exchangeDrawer, Drawee, Payee

Usually, the payer is opening bank under L/C or importer under collection

(3) Kinds of bill of exchange:

By drawers: Banker’s Draft Commercial Draft

By documents: Clean Draft or Clean Bill Documentary Draft

By time of payment: Sight Draft Usance Bill or Time Bills

(4) The Use of Draft

1. IssueThree ways of writing payees: ：（ 1 ） Restrictive Payee

（ 2 ） To order

（ 3 ） To bearer

2. Presentation Payment Presentation Acceptance Presentation

3. Acceptance

4. Payment

5. Endorsement（ 1 ） Types of EndorsementBlank EndorsementEndorsement（ 2 ） Prior party and Subsequent partyPrior party has the liability of guaranteeing subsequen

t party has his draft being accepted or paid.（ 3 ） Discount

6. DishonourNote: In the above-mentioned steps, sight draft do

n’t need acceptance.

2. Promissory Note (1) Definition of promissory notePromissory note is an unconditional promise in

writing.

(2) Basic Content of promissory note(3) Classification of promissory note1. Commercial paper (including sight and time

commercial paper)2. Cashier’s order(4) The difference between promissory note and

draft

3. Check(1) Definition of Check

A check is a bill of exchange drawn on a banker payable on demand.

(2) Basic Content of Check

(3) Classification of Check 1. Open check, cash check and check for

transfer 2. Crossed check and uncrossed check 3. Certified check

(4) Valid term of check

Section 2: Remittance and Collection

1. Remittance(1) The meaning of remittance and involved

parties

① 1. The meaning of remittance

② 2. Related parties of remittance: Remitter Payee Remitting Bank Paying Bank

(2) Kinds of Remittance

1. Mail transfer (M/T)

2. Telegraphic transfer (T/T)

Procedure diagrams of M/T and T/T ：3. Demand draft (D/D)

① Procedure diagram of demand draft D/D uses sight draft of the bank

② Differences between D/D, M/T and T/T

（ 3 ） Characteristics of remittance

（ 4 ） Applications of remittance in international settlement

1. Payment after Arrival of the Goods

2. Payment in Advance

3. Remittance against Documents

In case of advance payment, the importer will ask payee to offer some appointed documents to the paying bank

（ 5 ） Remittance clause Remitting time, remitting method and amount of pa

yment should be clearly stipulated

2. Collection（ 1 ） The meaning and classification of coll

ection

The meaning of collection

The kinds of collection: Clean Collection Documentary Collection

（ 2 ） Parties involved in collection

(3) Kinds of documentary collection By terms of payment:

1. Documents against Payment, D/P

（ 1 ） D/P at sightProcedure diagrams of D/P at sight:(2) D/P after sightProcedure diagrams of D/P after sight:

2. Documents against Acceptance, D/A

D/A is applied to the collection of time bill only

Procedure diagram of D/A ：

To exporter ， the risk is as followers ：D/AD/P after sight D/P at sight

(5) The nature and characteristics of collectionIt belongs to reverse remittance It is a commercial credit using commercial draftIt is in favor of buyer rather than seller.

(6) Cautions to the use of collectionBe careful to choose D/P after sight for exportersTrying to have export contract concluded in terms of

CIF or CIP. Otherwise insure export credit insurance on behalf of seller’s interest

(7) Collection clause Collation clauses should include the conditions to obtai

n documents, liability of payment or acceptance, and validity of payment, etc.

Section 3: Letter of Credit. L/C

1. The nature, feature and function of L/C

（ 1 ） The meaning and function of L/C

L/C is a kind of written document issued by bank with a conditional promise to pay.

（二） The characteristic of L/C

1. L/C is a kind of bank credit

2. L/C is independent of contract

3. L/C is a kind of pure document transition

Case analysis: One export firm receives a L/C coming abroad, the export firm shipped the goods according to L/C regulation, but before the documents send to the local negotiable bank yet suddenly received the notice of issuing bank,which declear that the applicant already gone bankrupt , so the issuing bank no longer bears the responsibility for payment. Q: How does the export firm deal with?

(3) Functions of L/C

1. Function on the exporter

2. Function on the importer

3. Function on the banker

2. The parties relating to an L/C① Applicant or Opener

② Opening Bank or Issuing Bank

③ Advising Bank or Notifying Bank

④ Beneficiary

⑤ Negotiating Bank

⑥ Paying Bank

⑦ Confirming Bank

⑧ Reimbursement Banks

⑨ Transferee

8. Reimbursement Bank

9. Transferee

Three basic parties in L/C business ： Applicant, Opening bank, beneficiary

3. Procedure diagram of L/C:

4. Main contents and issuing forms of L/C（ 1 ） Main contents of L/C

1. Pay attention to the issuing time of L/C. Usually, the issuing time is stipulated expressly in the contract. If not available, buyer should issue L/C in reasonable time.

Case analysis:

（ 2) Issuing forms of L/C

1. To open by Airmail

2. To open by Cable（ 1 ） Brief Cable

Brief cable is not an effective L/C document

(2) Full Cable

(3) SWIFT L/C

(2 ） By the responsibility of issuing bank1. Irrevocable L/C

2. Revocable L/C

5. Types of L/C（ 1 ） With or without shipping documents

1. Documentary L/C2. Clean L/C

(3) Whether it’s confirmed by another bank 1. Confirmed L/C

2. Unconfirmed L/C

(4) By ways of payment Sight Payment L/C Deferred Payment L/C Acceptance L/C

UCP500 Article 10: All Credits must clearly indicate whether they are available by sight payment, by deferred payment, by acceptance or by negotiation.

Usance L/ C payable at sight or buyer's usance L/C

(1) Advantage and disadvantage of Usance L/ C payable at sight

To importer: Can utilize the paying bank’ fund; But need to pay discount charges and acceptance commission.

To exporter: Can collect money immediately; but it has the risk of being recourse if the credit draft dishonored.

(1) The difference between usance L/C payable at sight and usance L/C

4. Negotiation L/C（ 1 ） Open Negotiation L/C

（ 2 ） Restricted Negotiation L/C

(5) Whether the right of L/C is transferable

1. Transferable Credit

2. Non-Transferable Credit

（ 6 ） Revolving Credit

1. Types of L/C

2. Advantages of L/C

3. Scope of application ：4. Samples of L/C

（ 7 ） Reciprocal Credit

1. Features of reciprocal L/C

2. Scope of application

（ 8 ） Back to Back Credit Features of Back to Back L/C Scope of application Amendment and Extension

（ 9 ） Anticipatory L/C Terms of payment in advance Red Clause L/C Green Clause L/C

(10) Standby L/C or commercial paper L/C1. The meaning and nature of Standby L/C

2. Scope of application

3. International Standby Practice 98

6. “UCP500”

7. Payment Clause of L/C in the contract

Section 4: Letter of Guarantee

1. The meaning and nature of L/G According to the condition of payment, L/G

can be divided into followings: Demand Guarantee Conditional L/G

2. Relating parties of L/G and their main responsibilities

3. Main contents of L/G See“UDG458” (Uniform Rules for Demand

Guarantee)

4. Types of L/G（ 1 ） Performance Guarantee

（ 2 ） Repayment Guarantee

（ 3 ） Tender Guarantee It is a kind of guaranty issued by the bank to the inviter for tend

er on behalf of the bidder which guarantees that the bidder will not withdraw the bid halfway or amend the bidding conditions unilaterally; and will not refuse to sign a contract after winning the bid.

5. Differences between bank L/G and L/C1 、 Under the L/C, the bank shall undertake the duty of payment;

while under the letter of guarantee, the bank shall be responsible for payment only in the case of non-performance of the contract by the applicant. So the issuing bank of the L/C is responsible for payment as the first payer, while the opening bank of the L/G is usually responsible as the second payer.

2. Under the L/C, the issuing bank handles business according to the stipulations of the L/C only and has nothing to the contract.

If one party breaches the contract or fails to perform his obligations, the opening bank of the L/G will be likely to be involved in the disputes of the contract.

3. The L/C is usually used in specific trade, while the L/G is used in the case of non-performance in a lot of areas.

4. L/C is restrained by “UCP500”, while L/G is not restrained by “UCP500”

Section 5: International Factoring

1. The meaning of International Factoring2. Parties involving in International Factoring3. Basic procedures of International Factoring4. Features of International Factoring

Trade financing Credit risk guarantee Trade account management and credit collection Credit investigating and assessing

5. The Choosing of International Factoring

Section 6: The choosing of payment instruments

1. Combination of L/C and Remittance

2. Combination of L/C and Collection In the case of payment by the combination of

L/C and collection, the bank will not deliver the documents until the whole purchase price is paid off.

3. Combination of Collection and Stand-by L/C or L/G

4. Combination of Remittance, Collection and L/C1. Pay by Installments ）2. Deferred Payment ）3. Differences between them:

The degree of loan repayment is different The time of ownership transferring is different Interest expense is different

Summary

This chapter introduces different kinds of payment methods used in the international business settlement, especially L/C and its related issues

Key terms: bill of exchange, L/C