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Cao, Danna Mae - IBT - Ass#5

Letters of credit (LCs) are commitments by banks that payment will be made to exporters if terms are met, protecting international traders. The buyer establishes credit with their bank to render this service. LCs are useful when reliable credit information about foreign buyers is difficult to obtain but the buyer's bank is considered creditworthy. LCs also protect buyers since payment isn't required until goods are shipped as promised. Document against acceptance are collection terms requiring drawees to accept drafts prior to receiving documents, restricting possession until acceptance. There are two kinds of time drafts: date drafts extending time from shipment and time-sight drafts extending time from arrival. The difference is which finances goods during transit.

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41 views2 pages

Cao, Danna Mae - IBT - Ass#5

Letters of credit (LCs) are commitments by banks that payment will be made to exporters if terms are met, protecting international traders. The buyer establishes credit with their bank to render this service. LCs are useful when reliable credit information about foreign buyers is difficult to obtain but the buyer's bank is considered creditworthy. LCs also protect buyers since payment isn't required until goods are shipped as promised. Document against acceptance are collection terms requiring drawees to accept drafts prior to receiving documents, restricting possession until acceptance. There are two kinds of time drafts: date drafts extending time from shipment and time-sight drafts extending time from arrival. The difference is which finances goods during transit.

Uploaded by

Danna Mae Cao
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Letters of Credit

Letters of credit (LCs) are one of the most secure instruments available to international traders.
An LC is a commitment by a bank on behalf of the buyer that payment will be made to the
exporter, provided that the terms and conditions stated in the LC have been met, as verified
through the presentation of all required documents. The buyer establishes credit and pays his or
her bank to render this service. An LC is useful when reliable credit information about a foreign
buyer is difficult to obtain, but the exporter is satisfied with the creditworthiness of the buyer’s
foreign bank. An LC also protects the buyer since no payment obligation arises until the goods
have been shipped as promised.

Document against acceptance


Collection terms of payment that require the drawee to accept a draft or drafts drawn for future
maturity at the presenting bank prior to receiving the accompanying documents. Typically, such
collections include a document that restricts possession or ownership, thereby forcing the drawee
to accept the draft in order to obtain the relevant goods. The presenting bank then conveys the
acceptance at maturity date(s) to the drawer through its bank, and presents the draft for payment
when due. There are two kinds of time drafts: those payable at a predetermined time from the
day shown on the face of the draft (date drafts), and those payable at a predetermined time from
the date(s) the draft was accepted (time-sight drafts). As the date shown on drafts normally
corresponds to the date of the transport document, date drafts extend time from shipment.
Time-sight drafts, however, are normally accepted once the goods have arrived and thereby
extend time from arrival. The net difference, therefore, is which part finances the goods during
transit time. The question of protest should be addressed when considering these payment terms.

Demand draft
A demand draft, also called a remotely created check (RCC), is a negotiable instrument to
transfer funds from one bank to another. It is issued by a bank to a client (drawer) in order to
direct a different bank or another branch of the same bank (drawee) to pay the specified amount
of money to the payee.
When a demand draft is issued to the drawer, the money is debited from the drawer’s account.
Once it is given to the payee and he/she presents it to the bank, it is immediately paid out to the
payee in the form of cash or check.
Sometimes, the drawer and the payee can be the same person, as the drawer may want to transfer
money from one bank account to another account at a different bank.

Consignment
Consignment in international trade is a variation of open account in which payment is sent to the
exporter only after the goods have been sold by the foreign distributor to the end customer. An
international consignment transaction is based on a contractual arrangement in which the foreign
distributor receives, manages, and sells the goods for the exporter who retains title to the goods
until they are sold. Clearly, exporting on consignment is very risky as the exporter is not
guaranteed any payment and its goods are in a foreign country in the hands of an independent
distributor or agent. Consignment helps exporters become more competitive on the basis of
better availability and faster delivery of goods. Selling on consignment can also help exporters
reduce the direct costs of storing and managing inventory. The key to success in exporting on
consignment is to partner with a reputable and trustworthy foreign distributor or a third-party
logistics provider. Appropriate insurance should be in place to cover consigned goods in transit
or in possession of a foreign distributor as well as to mitigate the risk of non-payment.

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