Chapter 7
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International Payment
Objectives
After studying this chapter，you should be able to
1. identify three instruments of payment.
2. describe the types of remittance.
3. describe the workflow of collection and the letter of credit.
4. understand different types of collection.
5. describe the features of L/C.
6. list main kinds of L/C.
7. describe the main contents of L/C.
Key terms
Bill of exchangePromissory note
Check Remittance
Collection D/P
D/A Letter of credit
Payment of proceeds is an important part during the period of fulfilling the international trade contract. It concerns the profits of both the exporter and the importer .Compared with payment arrangements for domestic transactions, international payment arrangements are much more complicated and difficult .We will mainly discuss instrument and modes of payment .
7.1Instruments of payment
In international trade，it is impossible for the seller to deliver the goods and the buyer to make the payment face to face.
Usually，the seller delivers the goods and hands over the documents，and the buyer makes payment against documents.Instruments of payment are generally used in international trade practice.They are some documents that have monetary value，such as bills of exchange，checks，promissory notes. They are all used for the payment or transfer of money. Bill of exchange is most used in practice of them.
7.1.1 Bill of exchange
A bill of exchange is an unconditional order in writing，signed by the person（drawer）such as a buyer，and addressed to another person（drawee），typically a bank，requiring the drawee to pay a stated sum of money to another person（payee），often a seller，on demand or at a fixed future time.
Figure 7-1 Sample Bill of Exchange
This sample bill of exchange is drawn on The Moon Bank by the UVW Exports.
A bill of exchange must fulfill the following requirements
•the word“exchange”or “draft”.
•an unconditional order in writing.
•name and address of the drawee.
•drawer's signature，usually seller's signature.
•date and place of issue.
•name of the payee，usually the seller or its nominated bank.
•tenor.
•place of payment.
•amount.
In practice, there are three original parties to a bill of exchange: the drawer, the drawee and the payer. Generally the drawer is the exporter, the drawee is the importer, and the payee is usually the exporter or the order person of the drawer.
Types of bill of exchange
（1）Sight Draft / Term Draft.
•Sight Draft（Demand Draft）.
The sight draft is most commonly used in international trade. In a sight draft，the payment is on demand or on presentation of the negotiation documents to the paying bank or the importer.
•Term Draft.
The term draft，also called time draft or usance draft，is used in a deferred payment arrangement. The payment is on the maturity date determinable in accordance with the stipulations of the letter of credit（L/C）. The maturity date can be at a stated period after sight or after date.
e.g. at 30 days sight
at 90 days after date
at 150 days after B/L date
When the drawee accepts a time draft, he will write or stamp the word “ACCEPTED” on the face of the draft ,plus the authorized signature and the date accepted.
（2）Clean Draft /Documentary Draft.
•Clean Draft.
In a clean draft，no commercial or shipping documents are attached to the draft. The documents are sent together with the goods，directly to the importer.
•Documentary Draft.
In a documentary draft，the commercial or shipping documents are attached to the draft. The importer will be able to receive the commercial or shipping documents from the collecting bank only after he has accepted the draft for payment later or after he has paid the draft.
（3）Commercial Draft/Banker's Draft.
•Commercial Draft.
It is a bill issued by a commercial enterprise on another enterprise or on a bank.
•Banker's Draft.
It is a draft drawn by a bank on another bank. Both the payer and payee are banks.
Handling a bill of exchange
The usage of a bill of exchange includes such stages：
• •Issue.
• •Presentation/acceptance.
• •Payment.
• •Endorsement.
• •Dishonor.
• （1）Issue.
• Issue means the drawer fills up the particulars in a bill of exchange：the name of the drawee，the payee，the date of drawing，the time and amount of the payment，etc.，as is shown in the above instance of draft. The draft is signed by the drawer and then sent to the bearer.
• The payee can be written in three types：
• •a restrictive payee，such as“pay A Co. only”，“pay B Co. not transferable”.
• •to order，such as“pay xx Co. or order”，“pay to the order of xx Co.”.
• •bearer，such as“pay bearer”.
• With the exception of the restrictive payee ,the other two are negotiable and transferable. “To order” type requires endorsement where transferring, while the “to bearer” type requires no endorsement.
• （2）Presentation and acceptance.
• Presentation is the act of taking the bill by the bearer to the drawee（the payer）and demanding that he makes the payment or accepts the bill. For the drawee（the payer），to see the bill is called sight.
• Acceptance is a promise made by the drawee that he will make the payment at the maturity of a time bill.
• For a sight bill, payment should be made at the same time when the presentation is made.
• For a time bill, the drawee is required to accept the bill when the bill is presented to him. He needs to write “accepted” on the bill, along with the date and his signature. Then the bill is given back to the holder of the bill. Upon acceptance, the drawee becomes the acceptor. He is then obliged to pay at the maturity of the bill.
•
• （3）Endorsement.
• If the payee is “to the order of”，the bill of exchange is negotiable and transferable. Endorsement is done when the bearer of the draft has signed his name or the endorsee's on the back of the bill. Negotiation and transfer are effected with endorsement.
• The holder of the bill can get the cash before the bill matures by discount 。Discount means the bearer transfer the bill to the bank by endorsement and the bank will pay the bill immediately after deducting the interest and some fees, so the cash for the bill is little less than its face value .Then the bank will collect the full amount from the accettor when the bill become s due.
• （4）Payment.
• •Sight bill—the drawee is required to make the payment when the bill is presented to him.
• •Time bill—the drawee is required to accept the bill when the bill is presented to him and make the payment at the maturity of the bill. In accordance with the international business convention，the drawee may pay the bill in three days when the bill is due.
• （5）Dishonor and recourse.
• Dishonor is the refusal to make payment or accept a bill by the payer when it is presented for payment or acceptance.
• Upon dishonor，the holder of the bill gets the right of recourse against his prior endorser. But he should immediately make the protest（or certificate of dishonor）which is an official document made by the local notary public，bank，chamber of commerce，or trade association testifying that the bill of exchange has been dishonored.
• 7.1.2 Promissory note
• A promissory note is a written note by the maker who promises to pay a specific amount of money at a specific time to a specific payee or bearer.
• As a promissory note is a promise by the maker（instead of drawer）to pay to the payee，there are only two parties concerned，the maker and the payee.
• Promissory notes can be commercial notes，which are issued by firms，or bank notes，which are made by bank. The commercial promissory note can be sight promissory note or time promissory note，but bank promissory note is only the sight one. In international trade，most of promissory notes are drawn by bankers and commercial promissory notes are rarely used. In using the banker's promissory notes，the importer first needs to buy the promissory note from a bank，and then send it to the exporter for the settlement of payment.
• Here is an example（see Figure 7-2）.
• Figure 7-2 Sample of Promissory Note
•
• Differences between a bill of exchange and promissory note
• The nature of a promissory note has much in common with that of a bill of exchange. However，there are some differences between these two instruments：
• （1）A promissory note is a promise to pay，while a bill of exchange is an order to pay.
• （2）There are only two parties to a promissory note，namely the maker and the payee，while there are three parties to a bill of exchange，namely the drawer，the drawee and the payee.
• （3）The maker is primarily liable on promissory note，while the drawer is primarily liable if it is a Differences between a bill of exchange and promissory note
• The nature of a promissory note has much in common with that of a bill of exchange. However，there are some differences between these two instruments：
• sight bill；and acceptor becomes primarily liable if it is a time bill.
• （4）When issued，a promissory note has an original note only，while a bill of exchange may be either a sole bill or a bill in a set，i.e. a bill drawn with the second of exchange and third of exchange in addition to the original one.
• 7.1.3 Check
• A check is an unconditional order in writing drawn on a bank signed by the drawer，requiring the bank to pay a certain sum of money to or to the order of a payee or to the bearer at sight. So it is also called “a demand draft drawn on a bank”.
• The drawer of a check must be a depositor that keeps an account current in the paying bank not less than the sum carried on the check，or the check will be dishonored when the holder presents it to the paying bank for payment. This kind of check is called “bounced check”.
• Checks are most used in domestic trade. But in international trade，checks are also used and here is an instance of check（see Figure 7-3）
•
Questions
（1）What's the difference between the bill of exchange and the promissory note？
（2）How is the bill of exchange transferred in the market？
Terminology practice
The following terms appeared in the text. Select one correct term for each of the following statements.
Promissory noteCheckBounced checkBill of exchange
（1）An unconditional order in writing signed by the person（drawer）and addressed to another person（drawee），typically a bank，requiring the drawee to pay a stated sum of money to another person（payee）on demand or at a fixed future time.
（2）A written note by the maker who promise to pay a specific amount of money at a specific time to a specific payee or bearer.
（3）A check which has been dishonored.
（4）An unconditional order in writing drawn on a banker signed by the drawer，requiring the banker to pay a certain sum of money to or to the order of a payee or to the bearer at sight.
7.2Modes of payment
In international trade practice ,it is important for an exporter and an importer to choose the most acceptable mode of payment .The exporter naturally wants to get paid as soon as possible ,while an importer usually prefers to delay payment until he received or even resold the goods. So they should be familiar with many payment modes to utilize in different situation.
Three kinds of payments are effective in foreign trade .They are remittance, collection, and letter of credit.
7.2.1 Remittance
Remittance means the importer on his own initiative remits money to the exporter through a bank or other ways according to the terms and time stipulated in the contract.
Parties involved in remittance business
In remittance，there are four parties involved：the remitter，the payee or beneficiary，the remitting bank，and the paying bank.
•Remitter—the importer.
A remitter is the person who requests his bank to remit funds to a beneficiary in a foreign country. A remitter is also called the payer.
Payee or beneficiary—the exporter.
A person who is addressed to receive the remittance is called the payee or beneficiary.
•The remitting bank—the bank in importer's place.
A remitting bank is the bank transferring funds at the request of a remitter to its correspondent or to its branch in another country and instructing the latter to pay a certain amount of money to a beneficiary.
•The paying bank—the bank in exporter's place.
A paying bank is the bank entrusted by the remitting bank with paying a certain amount of money to beneficiary named in the remittance advice.
When the remitter is to remit the money to the beneficiary，he comes to the remitting bank to fill an application form for the bank to effect the payment. Upon accepting the application form，the remitting bank should instruct the paying bank，which is usually the branch bank or correspondent bank of the remitting bank in the country of the exporter，to pay the beneficiary（see Figure 7-4）.
Remittance is chiefly used for payment in advance , cash with order, payment for arrival of the goods, commission, and sundry charges ,etc. For payment in advance or cash with order , the exporter is in an advantageous position. While payment after arrival of the goods ,the importer is in an advantageous position .Hence this method depends on the commercial credit of each party.
Ways of remittance
There are three kinds of remittance：Mail Transfer（M/T），Telegraphic Transfer（T/T）and Demand Draft（D/D）.
（1）Mail Transfer
Under this method，the importer gives money to the remitting bank which in turn issues a trust deed for payment and then sends it to the paying bank in the exporter's country，entrusting it with paying the specific amount to the exporter. The instructions between the banks are sent by ordinary or air mail. The fee of mail transfer is cheap but it is a little later for the exporter to receive the payment.
（2）Telegraphic Transfer
At the request of the importer，the remitting bank sends a trust deed for payment by cable or SWIFT（Society for Worldwide Interbank Financial Telecommunication）directly to the paying bank and entrusts it with paying money to the exporter. The difference between M/T and T/T is that the instructions of T/T are sent by cable instead of air mail. This means that the exporter can receive the money more quickly，but at the same time，the importer has to bear extra costs. It is often used when the remittance amount is large and transfer of funds is limited by time. The only way of authenticating a cable transfer is the test key. In recent years，T/T has become the most common method of remittance.
（3）Demand Draft（D/D）—remittance by banker's demand draft
The importer buys a banker's demand draft from the bank and then sends it to the exporter. On the basis of the above bank draft，the exporter takes the money from the relative bank in his place.
Questions
（1）What's the difference between Mail Transfer and Telegraphic Transfer？
（2）In what cases remittance is usually used in international trade payment？
Terminology practice
The following terms appeared in the text. Select one correct term for each of the following statements.
RemittanceMail transferTelegraphic transfer On one's own initiative
（1）Without prompting or direction from others；on one's own.
（2）At the request of the importer，the remitting bank sends a trust deed for payment by cable or SWIFT directly to the paying bank and entrusts it to pay money to the exporter.
（3）A mode of payment that the importer on his own initiative remits money to the exporter through a bank or other ways according to the terms and time stipulated in the contract.
（4）A type of remittance that the remittance instructions between the banks are made by ordinary or air mail.
7.2.2 Collection
Collection process is governed by a set of rules，published by the International Chamber of Commerce called Uniform Rules for Collections（URC522）.
Collection is a payment arrangement by the use of drafts. In this method，the exporter draws a bill of exchange on the importer for the sum due after the delivery of the goods，with or without relevant shipping documents attached，and asks his bank to arrange for the acceptance or payment of the bill abroad. The bank will carry out his instructions through its branch or a correspondent bank in the importer's place.
Parties to the collection arrangement
• （1）Principal. The “principal” is the party（usually the exporter）who entrusts the handling of a collection to a bank.
• （2）Drawee. The “drawee” is the party（usually the importer）to whom presentation is to be made in accordance with the collection instruction.
• （3）The remitting bank. The“remitting bank”is a bank authorized by principal to effect the collection from the drawee. Usually it is the exporter's bank.
• （4）The collecting bank. The “collecting bank” is usually the branch or a correspondent bank of remitting bank in importer's country. It delivers the documents to the importer after receiving the payment under the instruction of remitting bank.
• Types of collection
• There are clean collection and documentary collection used in international trade.
• （1）Clean collection.
• Clean collection means collection of financial documents not accompanied by commercial document.
• Financial documents mean bills of exchange, promissory notes, checks, payment receipts or other similar instruments used for obtaining the payment of money.
• Commercial documents mean invoices, shipping documents, documents of title or other similar documents or any other documents used for whatsoever, not being financial documents.
• （2）Documentary collection.
• Documentary collection means collection of financial documents accompanied by commercial documents，or commercial documents not accompanied by financial documents. The documentary collection is widely used in international trade. There are“Documents against Payment”and “Documents against Acceptance”for documentary collection.
• Documents against Payment（D/P）
• With this payment method，the exporter releases the documents on the condition that the importer has made the payment. The exporter draws a draft on the importer for the value of the goods after shipping the goods ordered，and then delivers the draft with the relative shipping documents to the importer abroad through the remitting bank.The collecting bank gets the instructions not to release the documents to the importer until the payment for the goods is made.
• According to the time of making payment，D/P can be divided into two types：Documents against Payment at sight（D/P at sight）and Documents against Payment after sight（D/P after sight）.
• •D/P at Sight.
• Under D/P at sight, the exporter issue a sight draft, and then presents it with commercial documents to the importer through the remitting bank and the collecting bank.The importer must make the payment at once upon receiving the sight draft before he can get the commercial documents.
• •D/P after Sight.
• Under D/P after sight ,the exporter issues a time (or usance ) draft payable on a special due date or a certain number of days ,for example , a draft at 30 days’s sight ,which is then presented to the importer through the remitting bank and the collecting bank . The importer makes acceptance on the draft upon receiving it. When the time is due, the importer obtains the shipping documents from the collecting bank only after he pays themoney for the goods.
• With this arrangement, the exporter is in a less advantageous position because he has to depend upon the importer’s willingness and ability to pay even the importer has accepted the draft. The importer is not obligated to pay for the goods until the maturityof the time draft .So this is more beneficial to the importer than to the exporter.
• Documents against Acceptance（D/A）
• With this method，the commercial documents will be released to the importer on the condition that he has made acceptance on the draft. The exporter issues a time draft，and then presents it along with the commercial documents to the importer through the remitting bank and the collecting bank after shipment. The collecting bank will release the documents to the importer after he has made the acceptance，and the importer will make the payment only at the expiry of the draft.
• D/A is more risky than D/P for the exporter. Because by this payment，the importer can get the commercial documents and take delivery of the goods only after making acceptance on the draft. Whether the exporter gets the payment or not will depend on the credit of the importer. Once the importer fails to make payment on the maturity of the draft，the exporter will suffer from losses of all the payment. So the exporter should be careful to use this term.
• For instance，an exporter drew a time draft on July 1st，2015. His collecting bank made the presentation to the importer on the same day when the draft was received on July 10，2015，then under the three different types of D/P at sight，D/P at 60 days and D/A at 60 days，the presentation and acceptance day of the draft，the date of payment，and the date of the documents releasing are as follows（see Table 7-1）
• Table 7-1Dates under three different payment types of Documentary Collection
Payment terms | Date of presentation | Date of acceptance | Date of payment | Date of documents releasing |
D/P at sight | July 10，2015 | No acceptance | July 10，2015 | July 10，2015 |
D/P at 60 days | July 10，2015 | July 10，2015 | Sep. 10，2015 | Sep. 10，2015 |
D/A at 60 days | July 10，2015 | July 10，2015 | Sep. 10，2015 | July 10，2015 |
•
• Process of collection（see Figure 7-5）
Step 1: The exporter delivers the goods and obtains the shipping documents.
Step 2: The exporter, known as the principal, delivers the following documents to the collecting bank: bill of exchange drawn on the importer, documents for the goods of title and collection instructions to the remitting bank.
Step 3: The collecting bank sends the collecting instructions and documents to the collecting bank.
Step 4: If the instruction are D/P, the collecting bank will relase the documents to the importer only against payment. In case of D/A , the collecting bank will release the documents against acceptance of the bill of exchange by the importer.
Step 5: After the payment is made by the importer, the collecting bank transfers the account to the remitting bank.
Step 6: The remitting bank transfers the account to the principal.
Collection belongs to commercial credit. If the importer does not pay for the goods, the bank will not bear any responsibility. The bank's responsibility is simply to deliver the documents and collect the money. Whether the exporter can get the money depends on the credit of the importer.
Points that should be paid attention to in adopting collection
In adopting this method，the exporter should pay attention to the following points：
• （1）Making sure that the oversea importer is of good reputation and of good financial standing. Importer may reject the goods after the arrival of the goods on some excuses，with the hope of forcing the exporter to reduce the price.
• （2）Taking into consideration the economic and political conditions in the importing country. If the market price of the imported goods falls，the importer may also reject the payment.
• （3）The amount of transaction should be moderate so as to avoid suffering large risks.
Questions
（1）What's the difference between Document against Payment（D/P）and Document against Acceptance（D/A）？
（2）What's the risk for the exporter to utilize the collection as the payment mode？
（3）What's the difference between D/A and cash on delivery？
Terminology practice
The following terms appeared in the text. Select one correct term for each of the following statements.
CollectionD/P at sightD/P after sightD/A
（1）A payment arranged by which the exporter draws a bill of exchange on the importer for the sum due after the delivery of the goods，with or without relevant shipping documents attached，and asks his bank to arrange for the acceptance or payment of the bill abroad.
（2）The importer makes acceptance on the time draft drawn by the exporter upon receiving it and when the time is due，the importer obtains the shipping documents from the collecting bank only after he pays the money for the goods.
（3）The importer must make the payment at once upon receiving the sight draft drawn by the exporter before he gets the commercial documents from the remitting bank and collecting bank.
（4）The importer gets the commercial documents from the collecting bank only on the condition that he has made acceptance on the draft.
7.2.3 Letter of credit
Definition of the L/C
According to UCP600，credit means any arrangement，however named or described，that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honor a complying presentation.
Honor means：
•to pay at sight if the credit is available by sight payment.
•to incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment.
•to accept a bill of exchange（“draft”）drawn by the beneficiary and pay at maturity if the credit is available by acceptance.
Complying presentation means a presentation that is in accordance with the terms and conditions of the credit，the applicable provisions of these rules and international standard banking practice.
Features of the L/C
•Letter of credit belongs to bank credit. As long as the beneficiary presents the stipulated documents in conformity with the L/C，the issuing bank of the L/C must make the payment firstly.
•Banks deal with documents. In letter of credit business，banks deal with documents，not goods or services or performance to which the documents may relate. That means the bank is not responsible for the goods，but only for the documents.
•A letter of credit is a self⁃sufficient document. Letter of credit is opened on the basis of the contract，and independent from the contract once it is opened. The bank is only bound by，responsible for the credit，and makes payment against documents which are fully in conformity with the credit.
Features of the L/C
•Letter of credit belongs to bank credit. As long as the beneficiary presents the stipulated documents in conformity with the L/C，the issuing bank of the L/C must make the payment firstly.
•Banks deal with documents. In letter of credit business，banks deal with documents，not goods or services or performance to which the documents may relate. That means the bank is not responsible for the goods，but only for the documents.
•A letter of credit is a self⁃sufficient document. Letter of credit is opened on the basis of the contract，and independent from the contract once it is opened. The bank is only bound by，responsible for the credit，and makes payment against documents which are fully in conformity with the credit.
Features of the L/C
•Letter of credit belongs to bank credit. As long as the beneficiary presents the stipulated documents in conformity with the L/C，the issuing bank of the L/C must make the payment firstly.
•Banks deal with documents. In letter of credit business，banks deal with documents，not goods or services or performance to which the documents may relate. That means the bank is not responsible for the goods，but only for the documents.
•A letter of credit is a self⁃sufficient document. Letter of credit is opened on the basis of the contract，and independent from the contract once it is opened. The bank is only bound by，responsible for the credit，and makes payment against documents which are fully in conformity with the credit.
Parties to a letter of credit
• （1）Applicant or opener（importer）.
• （2）Beneficiary.
• （3）Issuing bank or opening bank.
• （4）Advising bank.
• （5）Confirming bank.
• （6）Negotiating bank.
• （7）Paying bank.
• （8）Reimbursing bank.
Figure 7-6 The Process of L/C Business
The basic contents of L/C
The banks in different countries use different forms of L/C though the International Chamber of Commerce has recommended several standard forms. The main contents of L/C vary with the types of L/C，but the basic contents of L/C are similar. It includes the following items：
（1）The main parties involved，including the applicant，the issuing bank，the paying bank，beneficiary and negotiating bank etc.
（2）Remarks about the L/C，including the number of the L/C，its type，the issuing date，and validity.
（3）The amount of the L/C.
The basic contents of L/C
（4）The clause of the bill of exchange，including the amount of the bill，the drawer，the drawee and paying date.
（5）The clause about the transportation，including place（port）of shipment，place（port）of destination，time of shipment，transshipment and partial shipment.
（6）The clause about documents，what documents are required，such as commercial invoice，the bill of lading，the insurance policy，the packing list，also，the required number of copies of the documents.
（7）Description of the goods，including specifications，quantity，packing，unit price etc.
（8）Guarantee clauses of the opening bank，which testify that the opening bank will be responsible for the payment.
（9）Particular clauses，special provisions about the deal in accordance with the particular business or political situations of the importing country.
Kinds of letter of credit
（1）According to the attached documents.
•Clean L/C.
A clean L/C is a credit under which the payment will be made only against a clean draft without any shipping documents attached or sometimes，against a draft with an invoice alone. It can be used in the case of prepayment in international trade.
•Documentary L/C.
A documentary L/C is a credit that should be negotiated by a documentary draft accompanied by shipping documents which representing title to the goods，such as a bill of lading. Even an L/C is negotiable only by shipping documents，without any draft，it is also called a documentary credit. It is universally used as a method of payment in international trade.
（2）According to the revocability of credit.
•Revocable L/C.
A revocable L/C is a credit that can be amended or cancelled at any moment by the issuing bank without advising the beneficiary. This kind of L/C is unlikely to be acceptable to exporters in foreign trade for it does not provide any guarantees to them.
•Irrevocable L/C.
An irrevocable L/C cannot be modified or withdrawn by either the issuing bank or the importer within the credit validity without the consent of the exporter. As long as the exporter presents the shipping documents，which are in conformity with the stipulations of the L/C，the issuing bank should take the responsibility of making payment. The exporter only accepts this kind of L/C generally.
According to UCP600，a credit is irrevocable even if there is no indication to that effect.
3）According to the adding of confirmation.
•Confirmed L/C.
A confirmed L/C is a credit that is added another bank's（usually the advising bank）confirmation to the beneficiary. The confirming bank promises to make the payment against the documents that comply with the credit.
•Unconfirmed L/C.
If an L/C is not confirmed by another bank，it is called an unconfirmed credit. But the word “unconfirmed” is not indicated in the credit.
（4）According to the time of payment.
•Sight L/C.
Sight L/C is an L/C under which the exporter draws a sight draft，and the opening bank or the paying bank makes payment to the exporter against the exporter's documentary invoice or shipping documents. The exporter can readily and surely get its payment under this kind of L/C.
•Usance or time L/C.
Usance L/C is an L/C under which the opening bank or the paying bank makes payment within the stipulated period upon receipt of the documents stated in the L/C. The exporter issues his draft，presents it for acceptance，together with all the shipping documents，to the issuing bank or to the confirming bank or to the paying bank，as stipulated in the credit. Once the draft is accepted，it means that the accepting bank promises to pay the full amount of the draft at a specified future date.
（5）According to the transfer of credit.
•Transferable credit.
Transferable credit is normally used when the first beneficiary is a middleman who does not supply the merchandise himself，and so wishes to transfer part or all of his rights and obligations to the actual supplier as second beneficiary.
•Non⁃transferable credit.
If the word “transferable” is not indicated in the credit，it is deemed to be a non⁃transferable credit.
（6）Standby L/C.
Standby L/C is a kind of clean L/C. It is also called commercial paper L/C，or guarantee L/C，or performance L/C. The issuing bank promises in this standby L/C to the beneficiary that it will bear some liabilities on behalf of the applicant if the later has not duly fulfilled his obligations as required by the contract.
（7）Red clause L/C.
Often an exporter doesn't have the funds to produce products to fill current orders. A letter of credit may have already been issued by the importer in anticipation of goods being exported. If allowed by the terms of credit，the exporter may draw upon the letter to obtain funds to produce goods. Once the goods are delivered，the exporter may submit the proper documents to obtain the balance of the letter of credit.
（8）Back to back L/C.
The exporter sends the L/C established by the importer in his favor to a bank as sole security，requiring the local bank to reopen an L/C in favor of the actual exporter. The L/C opened by the importer is called the original L/C，while the second L/C issued in favor of the actual exporter at the request of the exporter is called the subsidiary L/C. This type of L/C is suitable for business through a middleman，i.e.，a broker or commission man.
The different types of fulfillment of the credit
In the availability of the credit，the bank fulfills its obligation to pay the exporter mainly in three types：payment，negotiation and acceptance.
• （1）Payment.
• （2）Negotiation.
• （3）Acceptance.
• Process of L/C amendment
• L/C amendment may be advised to a beneficiary through an advising bank.The process（see Figure 7-7）is as follows：
Points that should be paid attention to under the payment by L/C
（1）An L/C must bear a valid period，and the documents must be presented within the valid period.
（2）According to UCP600，a presentation including one or more original transport documents must be made by or on behalf of the beneficiary not later than 21 calendar days after the date of shipment as described in these rules，but in any event not later than the expiry date of the credit.
（3）According to UCP600，a nominated bank acting on its nomination，a confirming bank，if any，and the issuing bank shall each have a maximum of five banking days following the day of presentation to determine if a presentation is complying. This period is not curtailed or otherwise affected by the occurrence on or after the date of presentation of any expiry date or last day for presentation.
Questions
（1）What's the advantage both for the buyer and the seller in utilization of the letter of credit for payment？
（2）What's the advantage and disadvantage of L/C？
（3）What are procedures of amending the L/C？
Terminology practice
The following terms appeared in the text. Select one correct term for each of the following statements.
Documentary L/C Irrevocable L/C Confirmed L/C Transferable L/C
Standby L/C
（1）A type of L/C that cannot be modified or withdrawn by either the issuing bank or the importer within the credit validity without the consent of the exporter.
（2）A credit that should be negotiated by a documentary draft accompanied by shipping documents which representing title to the goods，such as a bill of lading.
（3）A credit that is normally used when the first beneficiary is a middleman who wants to transfer his right to the actual seller.
（4）A credit that is added another bank's confirmation to the beneficiary. The confirming bank promises to make the payment against the documents that comply with the credit.
（5）A credit that the issuing bank promises to the beneficiary that it will bear some liabilities on behalf of the applicant if the later has not duly fulfilled his obligations as required by the contract.
7.3Combination of different modes of payment
7.3.1 Combination of L/C and remittance
Payment effected in this way is partly done by L/C and partly by remittance. If the remittance is made before the shipment of the goods，the money is taken as front money or advanced payment. If it is done after the shipment of the goods，it is often used for the balance of the payment for the consignment，which can be varied in amount.
7.3.2 Combination of L/C and collection
In this way the buyer should open an L/C for a certain percentage of the whole amount value of the goods，and the balance is to be collected. The contract should be declared clearly that the amount of payment under L/C would be available against a clean draft，while the balance of the payment would be available against documentary draft on collection basis. The shipping documents will not be released to the buyer unless he has effected all the payment.
This mode affords the exporter more secure way for payment than the way of only collection. On the other hand，the importer can cost less for opening the L/C.
7.3.3 Combination of documentary collection and standby L/C
In order to avoid risks in documentary collection，the exporter can ask the importer to open a standby L/C. Once the payment has been dishonored by the buyer，the exporter can demand the issuing bank of the standby L/C to make the payment. The time of validity of the standby L/C must be sufficiently long，so that after the payment has been dishonored，the seller has enough time to ask for the issuing bank for the payment.
Questions
In practice，how to make payment by the combination of the L/C and collection？
Terminology practice
The following terms appeared in the text. Select one correct term for each of the following statements.
Release Dishonor Consignment
（1）A set or group of goods or articles consigned at one time.
（2）Of a bill of exchange，failure by the person on whom the bill is drawn to accept it on presentation or having accepted it，failure to pay it at maturity.
（3）Set free or liberate sb/sth.
7.4Payment clause in a contract
7.4.1 Remittance
The buyer shall pay total amount of the goods in advance by T/T（M/T or D/D）to the seller not later than 15th of June 2015.
7.4.2 Collection
• （1）D/P at sight.
• Upon its presentation the buyer shall pay against documentary draft drawn by the seller at sight. The shipping documents are to be delivered against payment only.
• （2）D/P after time.
• The buyer shall duly accept the documentary draft drawn by the seller at 30 days after sight upon first presentation and make payment on its maturity. The shipping documents are to be delivered against payment only.
• （3）D/A.
• The buyers shall duly accept the documentary draft drawn by the sellers at 30 days after sight upon first presentation and make payment on its maturity. The shipping documents are to be delivered against acceptance.
7.4.3 Letter of credit
（1）Sight payment credit.
The buyer shall open through a bank acceptable to the seller an irrevocable sight letter of credit and the L/C should reach the seller 45 days before the month of shipment，valid for negotiation in China until the 15th day after the month of shipment.
（2）Deferred payment credit.
The buyer shall arrange with ABC bank for opening an irrevocable bank's acceptance letter of credit in favor of the seller within 10 days after receipt of seller's advice. The sight letter of credit shall be available by draft（s）at 30 days sight and remain valid for negotiation in China until the 15th days after shipment.
Questions
（1）In what case the exporter demands the payment should be combination of L/C and collection？
（2）In what case the exporter prefers the payment to be combination of L/C and remittance？
Terminology practice
The following terms appeared in the text. Select one correct term for each of the following statements.
Sight payment Deferred payment Negotiation
（1）The issuing bank promises to pay the exporter on a designated pre⁃agreed date in the letter of credit.
（2）When the exporter makes presentation of the documents and the documents are in accordance with the terms of the credit，the paying bank must make the payment at once.
（3）It means the purchase by the nominated bank of drafts and/or documents under a complying presentation by advancing funds to the beneficiary.
7.5Key words，phrases and special terms
Acceptance n.承兑
Advising Bank通知行
Applicant or opener开证申请人
Beneficiary n.受益人
Bills of Exchange汇票
Bounced check 被拒付而退回的支票
Check n.支票
Clean Collection光票托收
Clean Credit光票信用证
Clean Draft光票
Documentary Draft跟单汇票
Documentary Collection跟单托收
Draft n.汇票
Drawer n.出票人
Drawee n.受票人
Endorsement n.背书
Financial documents金融票据
Collection n.托收
Collecting Bank代收行
Commercial document商业票据
Confirmed Credit保兑信用证
Confirming Bank保兑行
Demand Draft（D/D）票汇
Discount n.贴现
Dishonor v.拒付
Documents against Payment付款交单
Document against Acceptance承兑交单
Documentary Letter of Credit跟单信用证
Fulfill v.履行
Issue v.出票，开证
International Chamber of Commerce（ICC）国际商会
Irrevocable credit不可撤销信用证
Issuing bank or opening bank开证行
Letter of Credit（L/C）信用证
Mail Transfer（M/T）信汇
Maturity date（票据）到期日
Negotiable adj.可流通的
Negotiation n.流通；议付
Negotiating Bank议付行
Notary Public公证人
Payee n.收款人
Paying Bank付款银行
Presentation提示
Principal n.委托人
Promissory Note本票
Protest n.声明,拒付证书
Recompense n. v.补偿
Remittance n.汇付
Remitting Bank托收行
Revocable Letter of Credit可撤销信用证
Sight draft即期汇票
Standby L/C备用信用证
SWIFT（Society for Worldwide Interbank Financial Telecommunication）
全球银行金融电讯协会
Telegraphic Transfer（T/T）电汇
Term draft/ time draft/ usance draft远期汇票
Tenor n.付款期限
Transferable Credit可转让信用证
Trust deed委托书
Uniform Customs and Practice for Documentary Credits
《商业跟单信用证统一惯例》
Uniform Rules for Collections document number 522（URC522）
7.6 Basic Skill Training
