Unit Six

1. Unit Six International Payment

2. Objectives • Get the students to be familiar with the international payment. • Cultivate the students’ ability of problem-solving. • Help the students overcome the vocabulary barrier in reading.

3. Section A • Introduction • In international business, terms of payment have been the key parts in the contracts all the time. It involves how exporters collect the pay for their goods in time and guarantees the normal and orderly development of their business. In international trade, both the exporter and importer face risks in an export / import transaction as there is always the possibility that the other party may fail to fulfill the contract. In order to guard against such possibilities, different methods of payment have been developed. As circumstances vary, the choice of payment terms is also flexible.

4. Pre-reading • Before reading the following passage, answer the question: • How can we guard against the possibility that the other party may fail to fulfill the contract in an export / import transaction?

5. Text International Payment • In general, there are several basic methods of payment in international trade. • Payment in Advance • By insisting on cash in advance the seller obviously has complete assurance of obtaining payment. This method is often used in cases where the exporter is not familiar with the buyer’s credit standing. Cash in advance may also be appropriate when the political and economic conditions in the buyer’s country make payment uncertain. This method places the burden for financing the transaction entirely on the buyer

6. Open Account • The procedure of this term is rather simple. The exporter dispatches the goods; prepares all the documents (mainly the commercial invoice), and sends both the goods and documents to the customer, while title to the goods passes from seller to buyer from that moment, and then waits for payment. The payment is not made at the time when the goods are delivered or when the documents are presented, but at the time specified in the contract. On due date, it is up to the customer to arrange payment, so it is a good idea to arrange with each customer to remit his payment by Cable Transfer, or Telegraphic Transfer to the exporter’s bank, quoting the bank code, full name and address and account number. • This term is seldom used where both parties are not in fairly good harmony with each other, and where there are strict exchange restrictions to complicated settlement. This term is used where there is complete trust between the seller and the buyer.

7. Documentary Collection • Documentary collection is a means of ensuring that the goods are only handed over to the buyer when the amount shown on a draft is paid or when the customer accepts the draft as a commitment to pay by a specified time in the future.Payment by a draft or a bill of exchange has experienced many years in the history. It was the most popular means of payment before a letter of credit was introduced. The seller thinks it advantageous because he is assured that the buyer will not be able to get hold of the goods until he has either accepted a time draft or paid a sight draft. • As collection seeks no guarantee from the bank, the documents, especially the draft, have the extraordinary role in the operation. A draft, also called a bill of exchange, is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future a certain sum of money to the order or to the bearer.

8. In documentary collection the bank acts on the instructions of the exporter and the exchange of the documents to title takes place at the buyer’s place of business.Once the exporter has dispatched his goods to the customer, the exporter collects the shipping documents, which give title to the goods. He draws a bill of exchange on the buyer. This merely means that he fills in a bill of exchange with all the relevant details relating to the particular shipment.This is made out to be payable either on sight or on demand or within a specified time. The exporter sends the draft and other shipping documents to the remitting bank, which forwards them to the collecting bank in the buyer’s country. If the draft is a sight bill and money is actually paid when the bill is presented, this arrangement is known as document against payment (DP).It is known as document against acceptance (DA) when the draft is a time bill and the money is paid within a specified time.The exporter takes a risk when he sells on the basis of DA. The buyer may refuse to pay or accept the bill. When a bill is dishonored, the bank refuses to give the buyer the bill of lading giving title to the goods. The bank seeks instructions from the exporter on how it should act.

9. Documentary Credit • Cash payment in international trade is rarely adopted; instead, non-cash payment is commonly used. Payment by credit transfers the importer’s obligation of payment to the bank, which ensures that the exporter can get payment safely and promptly while the importer gets the shipping documents on time. As we know, a buyer and a seller live far apart, international business is carried out beyond each other’ control and mutual trust is hard to establish. The seller is unwilling to ship the goods without receiving payment, while the buyer is reluctant to part with his money without actually controlling the goods. In case the credit worthiness becomes the major bottleneck, the problems of the buyer and the seller are solved by the intervention of a third party — the bank.

10. A contract often stipulates that payment is made by documentary credit agreed upon by both the buyer and the seller, who both wish for the superior credit standing of a large financial institution to stand between them. A documentary credit often referred to as LC is, in essence, a letter addressed to the seller, written and signed by a bank, as written engagement acting on behalf of a customer.If the seller conforms exactly to the specific conditions set forth in the letter of credit, the bank promises that the drafts by the beneficiary, up to a total of the stated amount, will be honored. In most commercial transactions, the conditions will state that the seller is to submit the required documents usually relative to the shipment of specified goods.Only when the documents presented are exactly as specified, will the bank pay.

11. Documentary credit is the product of international business and the creation of merchants and bankers and they have gone a long way, hand in hand, with the development and settlement of credit and money. Development of world business has always been an immense impetus to the evolution of documentary credits. Technological advance in banking, transportation and telecommunications have made it possible for the worldwide acceptance of credit operations. The objective of documentary credit is to facilitate international payment by making use of the financial expertise and credit reputation of the banks. It differs from other methods of payment in the credit and offers both the buyer and the seller a means of security. This bilateral security is the unique and characteristic feature of the documentary credit.

12. Post-reading Answer the questions on the text. • 1. Who benefits from cash in advance? Why? • 2. Exporting on open account is not considered as satisfactory. Why? • 3. What was the most popular means of payment before a letter of credit was introduced? • 4. On whose instructions does the bank act in documentary collection? • 5. What is DP? • 6. What is DA? • 7. What is a documentary credit? • 8. What will the bank do if the seller conforms exactly to the specific conditions set forth in the letter of credit? • 9. Under what conditions will the bank pay? • 10. What’s the unique feature of the documentary credit?

13. Section B Reading skills • Using the Dictionary • Here are a few general principles to keep in mind: • Never spend time looking up long lists of words, even if you really want to learn word on the list. • Do not interrupt your reading to check the meaning of a word in the dictionary unless the word is absolutely essential to the meaning of the sentence or paragraph. Instead, mark unknown words and look them up later. • Whenever you do look up a word, be sure to write down the word and its meaning. • Whenever you look up a word, be sure to read through all the meaning and choose the one that suits the context in which it is used.

14. Speed reading task • Let’s have a glimpse of application of the Credit. Use techniques for speed reading to find out the answers to Exercise 1 as quickly as possible.

15. True or false KEY: F T T F F F T T • 1. ______ After signing the international sales contract in which the Letter of Credit is stipulated as terms of payment, the seller goes to the bank to apply for issuing a credit in favor of the buyer. • 2. ______ It is best to state clearly in the application to ensure the issuing of the L/C. • 3. ______ If the strength and integrity of the buyer are not sufficient, the bank may require a cash deposit. • 4. ______ Since the Advising Bank has taken reasonable care to check the apparent authenticity of the L/C which it advises, the Beneficiary does not have to examine it carefully after having received the L/C. • 5. ______ If no problems are found, the Beneficiary should prepare and present the documents to the Issuing Bank for negotiation according to the requirements in the L/C. • 6. ______ If the Negotiating Bank has found some discrepancies in the documents, the Beneficiary could not be paid under all circumstances. • 7. ______ Usually the Issuing Bank has the documents examined by the Applicant in advance before it effects payment to the Negotiating Bank in order to avoid possible troubles . • 8. ______ Before the buyer takes the documents to claim the goods, he has to pay for the documents to the Issuing Bank.

16. Section C Case Study Task • Get the students in pairs, one plays as Mr. Salon, and the other plays as Mr. Li. work the following case out as a role play. The setting is at the office of Mr. Salon. About 10 minutes later, put up the performance in class. • Mr. Salon, a businessman of an American company, Mr. Li, the sales manager of a Chinese company. They discussed about the terms of payment. • Mr. Li thought a confirmed, irrevocable letter of credit was the certain mode of payment. The wording "confirmed" was a necessary part of the terms of payment in international business, and it helped guarantee payment. The letter of credit was at sight. So long as the documents were in full agreement with the contract, Mr. Salon should pay for the shipment immediately after he had received all the necessary shipping documents. In addition, Mr. Li agreed to forward all the papers to the bank three days after shipment and Mr. Salon promised to effect shipment according to the contract stipulation. .

17. NOTES • 1. Documentary collection is a means of ensuring that the goods are only handed over to the buyer when the amount shown on a draft is paid or when the customer accepts the draft as a commitment to pay by a specified time in the future. • 跟单托收是一种付款方式。在这种方式下，买方只有在支付汇票上标明的金额或在承兑汇票并承诺在将来某一特定时间内支付后才能提取货物。 • 2. A draft, also called a bill of exchange, is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future a certain sum of money to the order or to the bearer. • 汇票是由一方向另一方签发的无条件的书面支付命令，要求另一方(受票方）见票立即或在未来某一固定或可以确定的时间，支付一定金额给来人或持票人。

18. 3. In documentary collection the bank acts on the instructions of the exporter and the exchange of the documents to title takes place at the buyer’s place of business. • 在跟单托收的情况下，银行按照出口商的指示行事，在买方交易地交换代表货物所有权的票据。 • 4. This merely means that he fills in a bill of exchange with all the relevant details relating to the particular shipment. • 这仅仅意味着他开出一张记载有关该货物细节的汇票。 • 5. If the draft is a sight bill and money is actually paid when the bill is presented, this arrangement is known as document against payment (DP). • 如果汇票是即期汇票，买方见票即付，这种做法叫付款交单。

19. 6. It is known as document against acceptance (DA) when the draft is a time bill and the money is paid within a specified time. • 如果汇票是远期的话，买方则通常在见票后的某一特定时间内付款，这种做法叫承兑交单。 • 7. A documentary credit often referred to as LC is, in essence, a letter addressed to the seller, written and signed by a bank, as written engagement acting on behalf of a customer. • 跟单信用证（通常用LC表示）实质上是由银行代表买方起草和签署的寄给卖方的保证函。 • 8. If the seller conforms exactly to the specific conditions set forth in the letter of credit, the bank promises that the drafts by the beneficiary, up to a total of the stated amount, will be honored. • 如果卖方确实按照信用证的规定履行了信用证上规定的条款，银行就会履行去承诺对受益人出具的全部金额的汇票予以付款。