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Methods of payment

Пояснительная записка | The A B C of Banking | Banking today | Banks’ typology / classification. | Working assignment:_______________________________________________ |


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There are at least four basic methods of payment the bank can provide to its customers:

1. payment in advance (advance payment)

2. payment on open account

3. payment by Bills of Exchange

4. payment by Letter of Credit (LC)

Payment in advance or cash with order (CWO) is the simplest way to deal with. It avoids risks on small orders and may even be asked for before production begins. However, this form of payment is rare in international trade since it means that an overseas buyer is extending credit to an exporter – when the opposite procedure is the normal method of trade.

Variation of this form of payment is cash on delivery (COD) when your purchase is released upon payment of the invoice. Invoice or commercial invoice is a bill for the goods from the seller to the buyer.

Payments on open account presume that the goods and paying documents are sent directly to an overseas buyer who has agreed to cover the debt within a certain period of time after the invoice date - usually not more than 180 days. This method of payment is popular within the European Community because it is simple and straightforward.

Payments by Bills of Exchange. A Bill of Exchange is legally defined as “unconditional order in writing, addressing by one person to another, signed by the person giving it, requiring the person to which it is addressed to pay on demand or at a fixed determinable future time a certain amount of money, to or to the order of a specific person, or to the bearer”.

In other words an exporter prepares a bill of exchange which is drawn on an overseas buyer, or on the third party as designated in the export contract, for the sum agreed at settlement.

The bill is called a sight draft if it is made out payable at sight, i.e. “on demand”. If it is payable at fixed or determinable future time it is called a term draft.

By using a bill of exchange with other shipping documents through the banking system, an exporter can ensure greater control of the goods since the release of them to the buyer is subject to his acceptance and payment of the bill.

Payments by Letter of Credit (LC) or a documentary creditis the most sophisticated way to ensure the rights of the exporter. In simple terms, is a conditional bank undertaking of payment. Expressed more fully, it is a written undertaking by the bank (issuing bank) given to the seller (beneficiary) at the request, and on the instructions of the buyer (applicant) to pay at sight or at determinable future date up to a stated sum of money, within a prescribed time limit and against stipulated documents such as commercial invoice, certificate of origin, insurance policy or certificate and a transport document of a type appropriate to the mode(s) of transport used. A transport document applicable to a carriage of goods by the see is known as Marne Bill of Lading.

There are four major steps in the general procedure of LC usage.

First – the buyer and the seller conclude a sales contract providing for payment by documentary credit.

Second – the buyer instructs his bank – the issuing bank – to issue a credit in favor of the seller (beneficiary)

Third – the issuing bank asks another bank, usually in the county of the seller, to advise or confirm the credit.

Four – the advising or confirming bank confirms the credit and informs the seller that the credit has been issued.

Both parties engaged in the contract can be sure that their rights and interests are fully protected: sellers’ goods will be released to the buyers provided that full payment in their favor will be effected. In turn buyers will not lose their money since payment will be effected only upon shipment of the goods.

 


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