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Terms of Payment

Warm- up

How many instruments of payment do you know?

How many basic methods of payment do you know?

Have you ever heard about L/C?

Why is L/C generally used in international trade?

Learning objectives

⏹To learn the basic three instruments of payment –bill of exchange, promissory note and cheque.

⏹To learn the modes of payment in int’l trade – remittance, collection, letter of credit.

⏹To be aware of the advantage and disadvantage under different payment methods.

⏹To learn the letter of asking for easier terms

⏹To learn the letter of replying for negotiate payment terms

Terms of Payment

The terms of payment are an important part of the sales contract both sellers and buyers are concerned about.

Conditions under which the seller and buyer agree to settle the financial amount of the sales contract.

International payment arrangements are much complicated because:

Financial instruments

⏹In int’l trade, currencies and bills are two major means of payment.

⏹It is difficult for the buyer to pay and the seller to deliver the goods face to face.

⏹They use documents to fulfill their respective obligations, i.e., the seller delivers the goods and is paid against the documents, meanwhile the buyer makes payment and get the goods against the documents. Banks are intermediaries, and bills are instruments of payment.

Instruments of Int’l Settlement

Classification of drafts

1.According to time when the draft falls due:

----Sight (Demand ) Bill(Draft)

----Time ( Usance) Bill (Draft)

2.According to the Shipping documents attached or not:

----Clean Bill (no conditions)

----Documentary Bill

3.According to who the drawer is:

----Commercial Bill

----Banker’s Bill

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An Example of a Banker’s Draft

An Example of a Commercial Draft

Promissory Note 本票

中国建设银行现金支票样本

Three Main Methods of Payment

Types of Remittance

Remittance is chiefly used for

Payment in advance;

Cash with order;

Delivery first and payment afterwards;

Small quantity of goods;

Commission;

Sundry charges

Types of Remittance

⏹Mail Transfer, M/T

⏹Cheap but slow, seldom used

⏹Telegraphic Transfer, T/T

⏹Fast and safe for exporter to get the money

⏹The most commonly used type of remittance

⏹Demand Draft, D/D

⏹Flexible to draw money

⏹Convenient for the exporter

Types of Collection

Types of Collection

⏹Collection belongs to commercial credit.

⏹The banker only functions as a middleman, and his obligation is only to provide services of delivering documents and collect payment. The seller sends goods first, and gets payment later. Whether the seller can get the payment or not is reliable on the buyer’s credit. The buyer gets financing from the seller.

Letter of Credit, L/C信用证

⏹A L/C is a conditional written undertaking given by bank on the request of an importer to pay at sight or at determinable future date a certain amount of money to the exporter against stipulated documents, provided that the terms and conditions of the credit are complied with.

Letter of Credit, L/C信用证

The Characteristics of L/C

The advantages of using an L/C

It is reliable and safe for both sellers and buyers.

Because the issuing bank use its own credit to guarantee the payment of orders.

The disadvantages of using an L/C

Complicated procedure of applying for a L/C

Banks will charge service fee for issuing a L/C, therefore it add more cost to the buyer.

Confirmed , Irrevocable,

Documentary Credit, at sight