H.S.S.A.
E
Second year Economic English
International trade finance
The oldest method of payment in international trade is the Bill of Exchange. A bill
of exchange (also called a draft) is used when the seller or exporter needs to allow
some time for the buyer or importer to arrange payment. This is a form of credit.
Bills of exchange need not to be paid before 30, 60, 90 or more days. If the credit
is for a longer period than this, the sellers and buyers will need the service of an
export finance house or the equivalent of the U.K "Export Credit Guarantee
Department", a government organisation which provides credit and insurance for
export debts.
The most common method of arranging payment by a "bill of exchange" is to
attach the shipping documents, i.e the "bill of lading", the "commercial invoice"
and the "certificate of insurance" to the bill of exchange and present them to the
bank for payment. This is what is known as a "Documentary Bill of Exchange".
Example:
The letter of credit has already been issued by the buyer's bank in Caracas, and
has been confirmed by the Venezuelan bank's correspondent or agent in London.
The bank in London will then accept the Bill of Exchange on behalf of the buyer.
We now have an "Irrevocable Documentary Letter of Credit" or simply "Irrevocable
Documentary Credit". This means that the exporter is certain of payment. He is
able to draw a "bill" on London, which is a very convenient method of financing
international trade, from the exporter's point of view.
An "a sight" bill of exchange is a bill that must be paid when it is presented to the
company or bank which accepts it. Arrangement can be made between the buyer
and the seller about the transfer of documents. There are the shipping documents
which give title to ownership. These may be handed over in different ways:
-1. Documents against acceptance (D/A): this means that the buyer or his bank
will accept responsibility for payment of the sum on the bill of exchange when the
documents are surrendered.
2. Document against payments (D/P): this means that payment must be made
by the buyer or the buyer's bank when the documents are surrendered.
The language used in the bill of exchange is rather difficult. This is partly because
the bill of exchange has a long history. The seller can write his own bill or draft
and simplify it.
Letter of hypothecation:
If money is advanced by the bank to the exporter before his bill of exchange is due
for payment, he must send the shipping documents to the bank and write a letter
of hypothecation giving the bank the right to sell the goods if the bill of exchange
is dishonored.
Here is a typical example of a Bill of Exchange:
-----------------------------------------------------------------------------------------------------
£ 4,275.00 London 3rd May, 2000.
Thirty days AFTER SIGHT OF THIS FIRST OF EXCHANGE (SECOND AND THIRD OF THE SAME
TENOR AND DATE BEING UNPAID) PAY TO OUR ORDER four thousand two hundred and
seventy five pounds.
VALUE RECEIVED, PAYABLE AT THE CURRENT RATE OF EXCHANGE FOR BANKERS SIGHT DRAFTS ON
LONDON.
ARVA y Cia For WHITELEAF Ltd
………………………………………………………………………………………………………….
The 'drawer' of the bill is Whiteleaf Ltd; the 'drawee' is ARVA y Cia. Therefore,
Whiteleaf is the creditor and is owed money; ARVA is the debtor and owes money.
There are often three copies of the bill of exchange, in case one or two are lost. If
the 'first' of exchange is accepted (see example), then the other copies – the second
and third of the same tenor- are invalid.
The buyer or his bank accepts the bill by writing a signature across it, and then
either returns it to the drawer (or seller) or to his bank. The drawer can then hold
it until it matures or, he can have it discounted by his bank at the current rate of
discount.
illustration
Comprehension:
Tick the correct answer:
1. The Bill of Exchange (B.O.E) is a form of credit for the seller
True False
2. The drawer of the B.O.E is the one who must pay
True False
3. If the seller domiciles a bill of exchange, he leaves it with his bank until it is due
for payment.
True False
4. The seller can receive the amount of money written on the B.O.E at any time he
likes. True False
5. 30, 60, 90 days are the usual periods which elapse before the bill must be paid
True False
6. If the drawer discounts the B.O.E., he receives less than the amount written on
it.
True False
7. You can pay debts to others by endorsing a bill and giving it to them
True False
8. The buyer is described as the "drawee" on a B.O.E.
True False
9. A letter of hypothecation states that a bank does not have the right to own and
sell goods in the shipping documents.
True False
10. A 'sight' B.O.E must be paid immediately when it is presented.
True False
