Text 2 International banking

Two methods of payment used in international trade involve banks at home and abroad.

Bills of Exchange

A bill of exchange (B/E) is an order sent by the drawer (the person asking for the money / exporter) to the drawee (the person paying / importer) stating that the drawee will pay, on demand or at a specified time, the amount shown on the bill. If the drawee accepts the bill, they will sign their name on the face of it and date it

The bill can be paid to a bank named by the drawer, or the drawee can name a bank they want to use to clear the bill.  In the latter case, the bill will be kept at the drawer's bank until it is to be paid. When the bill is due it is presented to the paying bank. Such bills are said to be domiciled with the bank holding them. It is possible to send the bill direct to the drawee, if they are well-known to the drawer.

There may be two main types of bills: sight drafts, which are payable on presentation (at sight) or on acceptance and term drafts, which are drawn at various periods (terms) and are payable at a future date and not immediately they are accepted. Term drafts may pass through several hands before maturity and require endorsement by the Sellers.

A sight bill or sight draft is paid on presentation. In a  documents against payment (D/P) transaction, the sight bill is presented to the importer with the shipping documents, and the importer pays immediately, i.e. on presentation or at sight.

A bill paid days after sight (D/S) can be paid on or within the number of days specified on the bill. For example, 30 days after sight (or 30 D/S) means that the bill can be paid thirty days after it has been presented. A bill which is paid after a period of time is called a usance.

In a documents against acceptance  (D/A) transaction, the bank will ask the drawee to accept the bill before handing over the shipping documents. In the UK, bills of exchange drawn or payable in another country are known as foreign bills, and those used within the country in which they are drawn up as inland bills. A clean bill is one that is not accompanied by shipping documents.

The advantage to the exporter of payment by bill is that the draft can be discounted, i.e. sold to a bank at a percentage less than its value, the percentage being decided by the current market rates of discounting. So even if the bill is marked 90 days after sight, the exporter can get their money immediately by selling it to a bank. The bank, however, will only discount a bill if the buyer has a good reputation. The advantage for the importer is that they are given credit, provided the bill is not a sight draft.

The B/E is negotiable, which means that it can be used by the holder to pay debts of his own (i. e. he can negotiate it). To do this, the holder must endorseit, i. e. sign his name on the back of the bill before passing it on to the new holder. The holder may as well sell the bill to the bank, who will pay the face value, less interest, i. e. discount a bill; or leave the bill with a bank as security for a loan.

A dishonoured bill is one that is not paid on the due date. Failure to meet a bill on the due date would result in total dis­credit for the drawee, and the legal action can follow.  In this case the exporter will protest the bill, i.e. they will go to a lawyer, who will, after a warning, take legal action to recover the debt.

Documentary credits  

A bill of exchange might be dishonoured or an order might be cancelled. However, these risks can be reduced by issuing a letter of credit, which is a more binding form of payment. Documentary credits (letters of credit accompanied by documents) are widely used in foreign trade.

There are two types of letter of credit: revocable, i.e. those that can be cancelled, and irrevocable, i.e. those that cannot be cancelled except with the agreement of the seller. The first type is very rarely used these days. Documentary credits are governed by the International Chamber of Commerce code of practice, known as the Uniform Customs and Practice for Documentary Credits. The current code is ICC publication No.500 and is generally referred to as UCP500. The following are the essential documents which accompany a documentary credit: bill of lading, commercial invoice, insurance certificate.

Other documents which, in specific cases, it might also be necessary to include are:

- customs form,

-  certificate of origin (i.e. a certificate showing where goods were made, which is used to prevent goods from outside coming into a free trade area or customs union without being taxed),

- consular invoice (i.e. an invoice, or sometimes a stamp on the commercial invoice, giving permission for goods to be imported, issued by the consulate in the importing country),

- certificate of inspection (i.e. a certificate signed by agents to ensure the customer is getting goods of the type and quality he ordered),

- health certificate.

With Electronic Data Interchange (EDI) many of the relevant documents can be completed on computer templates to the exporter's specific requirements and transferred by email. In this case payment is made by SWIFT, the international bankers' computerized transfer of funds.

The stages in an irrevocable documentary credit transaction are as follows:

1  The importer (buyer) asks their bank to issue a letter of credit in favour of the exporter (seller). The importer applies for a letter of credit by filling out a form. This gives the following details: type of credit (i.e. revocable or irrevocable), beneficiary (the person receiving the money),

amount,  how long the credit will be available for (i.e. valid until a certain date), documents involved in the transaction (e.g. bill of lading, insurance certificate, commercial invoice), description of goods.

2 The importer's bank (called the issuing bank as it issues the letter of credit) asks a bank in the seller's country to advise the seller that a letter of credit has been issued in their favour. The issuing bank may also ask the bank in the seller's country to confirm the letter of credit (i.e. promise to see that the conditions of payment are fulfilled). For these reasons the bank in the seller's country is called the confirming or advising bank.

3  The exporters despatch the consignment to the importers and present the shipping documents (bill of lading, commercial invoice, insurance certificate, etc.) to the confirming bank.

4  The exporters draw a bill of exchange on the confirming bank. The bank pays the exporters against the bill and then sends the shipping documents to the issuing bank.

5  The issuing bank checks the documents and pays the confirming bank.

6   The issuing bank releases the shipping documents to the importers and debits their account.

7  The importers collect the consignment by presenting the shipping documents to the shipper.

Standby letter of credit     Exporters may require a guarantee to make sure that they are paid. This is frequently done by means of a standby letter of credit where the bank will pay the exporters if, for any reason, the importers do not pay.

It is often used when there is a contract involving several shipments and the exporters want to get part of, or all, of their payment at once. In some countries, the USA, for example, standby letters of credit are preferred to bank  guarantees and  have the advantage of being subject to Uniform Customs and Practice for Documentary Credits (UCP500).

6.2Think of English equivalents for the following:

Безотзывный аккредитив, дисконтная ставка, по требова­нию, банк-акцептант, обеспечение кредита, выписывать вексель на кого-либо, домицилирование векселя, обращаемый, номинальная стоимость, векселедержатель, вексельный обо­рот, предъявлять вексель к акцепту, опротестовать вексель, индоссант, обязанное по векселю лицо, простой вексель, векселедатель, плательщик, срок по векселю, возлагать обязательства, полный индоссамент.

6.3  Complete this fax requesting payment of an overdue invoice with

appropriate  form of the verbs in the box.

arrange assume have make regret remind

Dear Mr Debacker,

We..........¹ to have to .............²  you that payment of the following invoice is now 30 days  overdue.  As we never ³ occasion to send you a reminder before, we

............⁴ that this is just an oversight on your part. Could   you   please ..........⁵  for payment to be        .......⁶  within a week.

Yours sincerely,

Z. Lekic,

Credit Controller

                                            PAGE 1 of 2

Use the following notes to write G. Debacker's reply to Z. Lekic.

1 acknowledge receipt of fax

2 order incomplete (only the white has arrived)

3 waiting for rest of delivery

4 full payment as soon as all goods are received

5 prompt delivery essential as end of the year is approaching

6.4 Fill the gaps with letter of credit (L/C), banker's transfer or bill of exchange (B/E)

The ...  is a simple transference of money from the bank account of a buyer in his own country to the bank account of the seller in the seller's country. The ... is carried out at current exchange rates. Such ...  are subject to any exchange control regulations of the countries concerned. This transaction is simple and can be speeded up by cabled instructions if desired.

The ...  is an order in writing from a creditor to a debtor to pay on demand or on a named date a certain sum of money to a person named on the ...  , or to his order. The ...  is drawn by the creditor on the debtor, and is sent to the debtor for the latter to pay or accept (i. e. to acknowledge the debt). The debtor accepts by signing his name on the face of the ...  , together with the date. The ...  now becomes legally binding, and the acceptor must meet it on or before the due date. Shipping documents usually accompany ... when the bank acts as an intermediary in international transactions.

The ... most generally used method of payment, ideal for individual transactions or for a series, makes trade with unknown buyers easy, gives protection to both buyer and seller and overcomes the credit gap (i. e. the time-payment loss between order and delivery). The ...  starts with the buyer. He instructs his bank to issuethe ... for the amount of the purchase and in favour of the seller. The buyer's bank sends these instructions to its agent in the seller's country. On receiving these instructions, the agent bank writes to advise the seller of the  ... . It's normal to confirmthe   ... . This means that the agent bank undertakes to pay the seller money due to him, provided the conditions set out in the ... have been complied with. The seller can now execute the buyer's order, knowing that when he has done so, the money will be paid at once by the agent bank. The buyer is equally secure, because the agent bank will pay on his behalf only if conditions of the transaction are fully carried out by the seller. For this reason, great accuracy is needed in giving the original instructions.

6.5  Insert the right word or word combination choosing from the box.

loan            guarantee               first            advantageous

credit          contract                              bill              acknowledging

insurance    shipping                 waybill                   draws

lading         safe                        delivery      cash

advance      certificate               receipt        buyer

irrevocable letter of credit

1. The date of the bill of lading is considered to be the date of ....... .

2. Paying in ..... is quite ..... for the seller.

3. A draft is a security for ...... .

4. A ...... given by the carrier is called a ...... .

5. The seller ....... a draft on the ..... .

6. An ...... ....... .......... can not be cancelled without the consent of the seller.

7. The acceptance of the draft means ....... the debt.

8. An invoice, bill of lading, an insurance policy, a certificate of origin are called ...... documents.

9. Payment in ..... and on ....... can often be combined in a ....... .

10. The ...... of the first class bank makes transactions ...... .

6.6  Translate into Russian.

1) Dear Sirs,

We have been doing business with you for nearly a year and are pleased to say that we are more satisfied with the goods you have supplied.

In the coming year we will probably place regular orders with you and our present method of payment by letter of credit will be­come inconvenient. We would also find a short credit of advantage to our trading capacity.

We would therefore like you to supply us on monthly account terms, payment against statement within 30 days. You may refer to Messrs... and Messrs..., with whom we have credit accounts.

2)  Dear Sirs,

With reference to your invoice № 21078 of 23 of July, we have to point out that you have made an error in your total. We calculate the correct figure at $237, not $247 as given by you. Our cheque for the former amount is enclosed and we should be obliged if you would amend the invoice or pass the necessary credit.

6.7  This exercise concerns methods of payment used in international trade. Match the first half of the sentence on the left with the second half on the right:

Add appropriate words to these sentences:

1. Selling a bill or a financial instrument at a …….means selling it at less than 100%.

2. Letters of credit can be………..like other financial assets.

3. An accepting house is a specialized …….. bank.

4. A bill of ……proves the ownership of goods.

5. Factoring is a way of trading…….. .

6.8   One way of financing international trade is by a letter of credit. The foreign buyer transfers money from its bank to a correspondent bank in the exporter's country. This bank then informs the exporter that a letter of credit for a sum of money is available when it presents a bill of lading (a document prepared by the shipowner or his agent which acknowledges that the goods have been received on board the ship), a commercial invoice, and an insurance certificate. Another possibility is to pay by a bill of exchange, as in the following example of the export of a shipment of goods from Britain to Argentina.

What is the correct order of the following paragraphs?

a.  Meanwhile, the British manufacturer can sell the bill of exchange (at a discount) to an accepting house in London, so that it does not have to wait for payment.

b. On receiving an order from Argentina, a British manufacturer produces the goods. After arranging insurance, the manufacturer will send the goods to the port, with an invoice and a bill of lading, to be loaded onto a ship. When the goods have been shipped on board, the ship's master signs and returns the bill of lading to the producer.

с.   On the agreed date, the importer honours the bill of exchange.

d. The exporter will draw up a bill of exchange requiring the buyer to pay a certain sum of money on an agreed date, and present the bill to a London correspondent bank of the buyer's bank.

e. The London bank accepts a bill of exchange for the same amount. It will then send the bill of lading and the bill of exchange to Argentina.

f. When the documents arrive in Argentina, they will be given to the importing company when it accepts the original bill of exchange.

g. When the ship reaches its destination, the importer presents the documents to the master of the ship, and collects the goods. (If the goods do not arrive, the buyer will have to make an insurance claim.)

1. Find five verbs in the text that partner the noun goods.

2. Find six verbs in the text that partner the noun bill of exchange.

3. Find five different financial documents mentioned above.

6.9   Choose the best answer to the following questions.

1. Of the four payment methods below, which one has absolutely no risks for exporters?

a) advance payment b) bills for collection c)  letter of credit        

d)  open trade account

2. Which of these payment methods has fewer risks for exporters?

a)  bills for collection b) letter of credit    c) open trade account

3. Mark the following statements T (true) or F (false).

a) Advance payment is risk-free for the importer.

b) If advance payment is agreed, the exporter does not dispatch the goods until payment has been received.

c) Documentary credit is another way to refer to a letter of credit.

d) When the letter of credit payment method is used, the exporter sends all the documents direct to the importer.

e) A letter of credit means that the importer's bank guarantees payment.

f) The letter of credit method may involve some risks for the exporter if the documents are not correct.