Савчук. Foreign trade

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Match the words on the left with the words on the right:

Use the words in the list to complete these sentences:

Fulfil; refused; foreign exchange; risks; banned; bankrupt; reliable; defaulted

A Because it was_ the company could not pay the people who had supplied it with goods.

B All countries need _ to pay for imports.

C Before dealing with a buyer one should always make sure they are _ D The new government _ all trade with several countries.

E Several companies have _ and are unable to pay their accounts. F It took ten years for the government to _ its economic plan.

G In all business there are _ of losing money.

H The man _ to go away until he sees the manager.

THE BANKS AND PROBLEMS OF PAYMENT

Many of the risks in foreign trade are reduced by the work of the banks. They provide several services which give security to exporters and importers.

The risk of buyer default or non-delivery by exporters is removed by the method of payment against shipping documents. Also exporters’ banks proved information about the financial reliability of their customers. They also help arrange buyer credit or finance for the sellers. Without this a lot of trade would not take place at all.

There is also a risk of financial loss because of change in the exchange rate. If an Indian exporter agreed to sell goods for dollars and the value of the dollar in terms of rupees went down, the exporter would get fewer rupees for the dollars. Conversely, if the price of the dollar went up, the importers would lose money. An Arabian importer would have to pay more rials to buy the dollars. This kind of loss can happen in any export-import situation where the national currencies go up and down in terms of the payment currency, whether it is Deutschmarks, pounds, yen

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or francs. But the risk can be avoided, with the help of a bank, by buying the foreign exchange on the forward exchange market.

An exporter who is due to receive dollars arranges to sell then at a price fixed in the present but for delivery in two or three months. The time for delivery of the dollars depend on the length of credit given to the importers. At the same time the importers can arrange to buy dollars forward. In each case the traders pay a premium, but they can base their calculations on fixed exchange rates and avoid uncertainty and risk of loss.

Using contextual clues guess the best meaning of the word:

Supply one suitable word for each space:

Every exporter has problems of getting _ . There are even risks of buyer _ in rich countries. The importers might _ bankrupt or the government might not _ the importers to buy the payment _. On the other hand there are _ problems. The sellers need to be _ in advance but buyers have no _ and need credit. The sellers must _ good terms, otherwise they will lose _ customers who will look for other _. There are also problems caused by _ rates and changes of value of _ payment currency. If it falls, the _ loses money. Both sellers and buyers _ to be sure that the other _ will fulfil their side of the _. The exporters want to be paid _ full at the right time and _ importers want the right goods delivered _ time. These problems can be solve _ the banks acting as advisers.

PAYMENT IN FOREIGN TRADE

Paying for goods supplied in the home trade is a fairly simple matter. Payment is made either in advance or within a short period after delivery.

Payment follows by cheque or draft, and the whole transaction is speedily concluded. If a buyer fails to pay, legal action is reasonably quick and payment can be enforced. Even so, the granting of credit entails its own problems, and as modern trade depends on credit, this always needs careful handling.

These problems are magnified many times in foreign trade. A great deal of time is unavoidably spent on correspondence, despatch and delivery. Who is to bear this loss? Must the seller wait perhaps 6 months for his moneyor is the buyer to pay several months before he even sees his goods? Further, in a case of nonpayment, a seller will be involved in expensive legal action and possibly total loss.

In is here that banks play a vital part. Their services to exporters and importers include:

-Handling of shipping documents.

-Collection of payments.

-Observance of buyers’ conditions of purchase.

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-Discounting bills of exchange.

-Loans to exporters.

-Acting as agents for foreign banks and their customers.

By means of these services banks not only see to it that justice is done to both buyer and seller, but that the time-lag between order and delivery is overcome without loss to either party. These services have to be paid for, but are not expensive and are almost indispensablethe bank comes into every transaction at some stage or another.

Payments in foreign trade may be made by:

1.Banker’s transfer.

2.Bill of exchange.

3.Letter of credit.

Also, as in home trade, payment may be made

(a)in advance;

(b)on open account.

Payment in advance might be helpful to a buyer in urgent need, or where the buyer is unknown to the seller, or in the case of single isolated transaction. The actual method of payment in such cases would probably be by banker’s draft or banker’s transfer.

Open account terms would be granted by a seller to a buyer of unquestioned standing or to a customer in whom he has complete confidence, e.g. regular buyers, agents or distributors. Payment might then be made quarterly by bill of exchange or banker’s transfer.

THE BANKER’S TRANSFER

This is a simple transference of money from the bank account of a buyer in his own country to the bank account of the seller’s country. It is merely necessary for the buyer or a debtor to send a letter of instruction to his bankor use a special form. The transfer is carried out at current rates of exchange. Such transfers are, of course, subject to any exchange control regulations of the countries concerned. This transaction is simple and quick and can be speeded up by cabled instructions if desired.

THE BILL OF EXCHANGE (B/E)

A lot of foreign trade is paid for using Bills of Exchange so it is necessary to understand what a Bill of Exchange is. Basically it is a credit instrument or a piece of paper which can be turned into money later

The bill is an order in writing from a creditor to a debtor to pay on demand or on a named date a certain sum of money to a person named on the bill, or to his

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order. The bill is drawn by the creditor on the debtor, and is sent to the debtor (or his agent) for the latter to pay or accept (i.e. to acknowledge the debt). The debtor accepts by signing his name on the face of the bill, together with the date. The bill now becomes legally binding, and the acceptor must meet it on the due date.

The creditor (the drawer) can order the debtor (the drawee) to pay the money to any bank named by him on the bill. The drawee, in accepting the bill, can add the name of the bank which he wishes to pay the bill. In this case, the bill stays with the drawer’s bank till due for payment, when it will be presented to the paying bank for settlement. Such a bill is said to be domiciled with the holding bank.

An important feature of the bill of exchange is that it is negotiable, which means that it can be used by the holder to pay debts of his own, or in other words, he can negotiate it. To do this, the holder must endorse it, i.e. sign his name on the back of the bill before passing it to the new holder.

Other ways in which the holder can use a bill are:

1.Sell it to a bank, who will pay face value, less interest: this is called discounting a bill.

2.Leave it with a bank as security for a loan.

It is this free negotiability of the bill which makes it a practical means of payment in foreign trade. Of course, its successful operation depends on confidence and trust. Each individual firm’s standing and reputation is known and taken into account in handling bills.

The advantages of the bill will be clear to a student who understands something of modern commerce; perhaps the two chief assets are: (a) it simplifies the financing of export and import trade; (b) it saves innumerable individual money transactions, or movements of currency.

Failure to meet a bill on the due date would result in total discredit for the drawee, and legal action can follow. An unpaid bill is to be dishonoured, and the drawer can protest it, which clears the way for him to prosecute (i.e. take legal action against) the drawee.

Bills are either inland or foreign. An inland bill is drawn by a person in one country upon another person resident in the same country as a bill drawn in London upon a person in Sheffield.

A foreign bill is one which is drawn by a person resident in one country upon another person resident in some other country, as a bill drawn in New York upon a firm in London. Foreign bills are usually drawn in sets of 3, and sent abroad by different mails, so that in case the first gets lost by any means, the second or third may be safely delivered. Only one bill of the set should be accepted by the drawer.

The drawees agree to pay the draft at the time when it becomes due, that is say, 120 days after sight and the draft has to be accepted by being signed. But if a company of importers accepted the draft with their signature on the back, it would not have much value, because their name and the state of their finances might not

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be valued highly. So the draft has to be accepted by a well-known bank representing the importers. This turns the draft into a bill of Exchange which is sent to the exporters or their bank, who know by the signature on the back, that the bill will in fact be paid at maturity (60, 120 or 180 days after sight, the day the draft was accepted). The 3 extra days allowed in England for the payment of the bill are called days of grace.

Match the terms on the left with the explanations on the right:

Tick whether these statements are true (T) or false (F):

1.Bills of Exchange are used for foreign trade.

2.The writer of a draft is the drawer.

3.The drawee gets credit by accepting the draft.

4.The draft is accepted by the exporters.

5.Accepting Banks help finance foreign trade.

DISCOUNTING BILLS OF EXCHANGE

Suppose a firm desire to obtain money for the bill before the date on which it falls due. They can do so by taking it to banker, who will cash it them, giving them the amount stated on the bill less the charge for cashing it. This is called discounting the bill, and the amount charged by the banker is called discount. When selling the bill the drawer endorses it, that is, he writes his name across the back of the bill, which then becomes a negotiable document, and may be passed from one person to another, each one endorsing it in turn, until it is presented for payment at the bank

But how does the buyer of the bill make a profit? The discount for the bill gets less as time goes on. Also, an interest rate changes. So the holder of the bill can sell it again to another buyer, this time getting more than the amount he paid.

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Find words to complete these sentences:

1.Rising _ forced them to put up their prices.

2.The export license has a few more weeks to _ before we have to get another one.

3.A large _ of money has been wasted on the project.

4.According to the _ 5 year plan, a new factory will be built here.

5.They give _ for large quantity purchases.

DOCUMENTARY BILL OF EXCHANGE

When the bill has been drawn by an exporter, he attaches to it the shipping documents and hands the bill to the bank for collection, instructing the collecting bank how to deliver the documents to the buyer. If the documents are to be surrendered only against payment, the documentary bill is known as a “D/P” bill (D/P = documents against payment). This means the collecting bank gets immediate payment from the importers when it presents the shipping documents to them. If the instructions are to surrender the documents against acceptance of the bill, the documentary bill is called a “D/A” bill (D/A = documents on acceptance). This means they draw a time draft which has to be accepted by another bank acting for the importers. The draft might be drawn 90 or 180 days after sight so the importers’ bank has to pay the collecting bank 3 or 6 months after the day they receive the draft.

The collecting bank charges the exporters for its services and the accepting bank charges the importers for signing acceptance of the draft.

The exporters have to give instructions to the collecting bank what to do in case the importers dishonor the draft (i.e. refuse to accept or pay for it). The collecting bank may protest the bill. This means that banks and other companies dealing with them are informed about the dishonoring of the draft.

Tick whether these statements are true (T) or false (F):

1.When the exporters draw sight drafts the importers get no credit.

2.Bills for collection and sea shipping documents should get presented to the importers’ bank before the goods arrive.

3.Nothing happens if the importers dishonor the draft.

Payment by documentary bills is more risky for the exporters than the importers.

Supply one suitable word for each space:

It is very convenient to collect _ by documentary Bills of Exchange but _ is a bit risky for the _ . They have to rely on the _ honoring their drafts. If the importers

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_ not pay or accept the exporters’ _ , the exporters can not do anything _ it. They then have to pay _ storage and selling to someone else, _ even shipping the goods home. But _ importers who dishonor a draft may _ business if other people think they _ unreliable. But usually the exporters find _ about the reliability of a customer _ agreeing to this kind of payment.

THE LETTER OF CREDIT (L/C)

The most generally used method of payment in the export trade today is the letter of credit. It is ideal for individual transactions or for a series, makes trade with unknown buyers easily, gives protection to both seller and buyer and overcomes the credit gap (i.e. the time-payment loss between order and delivery).

A letter of credit starts with the buyer. He instructs his bank to issue the L/C for the amount of the purchase and in favour of the seller. This is usually done by special printed form. The instruction, or form, contains full details of the transaction as agreed between buyer and seller. The buyer’s bank sends these instructions to its agent (i.e. a bank co-operating with it) in the seller’s country. On receiving these instructions, the agent bank writes to advise the seller of the credit. In foreign trade it is normal for the agent bank to confirm the credit. This means that the agent bank undertakes to pay the seller the money due to him, provided the conditions set out in the L/C have been complied with. The seller can now execute the buyer’s order, knowing that when he has done so, the money will be paid at once by the agent bank. The buyer is equally secure, because the agent bank will pay on his behalf only if the conditions of the transaction are fully carried out by the seller. For this reason, great care and accuracy are needed in giving the original instructions.

It is not essential that a L/C be paid to the seller immediately upon execution of the order. If agreed between seller and buyer, the arrangement could be for the agent bank to accept a B/E drawn by the seller on the agent bank. This gives the buyer credit and is, of course, absolutely safe for the seller, who can discount the bill for ready cash if he needs it.

From these outlines of the methods in financing foreign trade, you will realize the vital part played by banks; without them, modern trade could not exist. Their services are paid for by their charges and these are kept low by the security they normally require against the risks taken. American importers often open the letter of credit at an American bank. This bank then confirms the credit to the foreign seller and requests him to draw on them for the amount of the invoice, and to send them all documents required by the buyer.

If the importers wish to guarantee payment of the credit they ask their bank to issue an irrevocable credit. This means the credit cannot be exchanged without the

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exporters’ and banks’ agreement. A credit without such a guarantee is a revocable credit and can be changed by the importer.

Pay attention to the following definitions:

Acceptance: An accepted bill; the act of accepting

Agent: Any person who acts, under authority, for another person Beneficiary: The person benefiting by a draft

Commission: A charge made on a percentage basis for services Correspondent: Sometimes this term is used for a bank which acts as an agent

for another bank

Days of grace: 3 days extra in which to settle a time bill Defaulter: A person who fails to pay a debt

Drawer: A person who draws a bill Drawee: A person drawn upon

Due date: The date by which a bill must be paid

To endorse: To sign a document (cheque, bill) passing right in it to another person

To expire: To come to an end; to be no longer valid

To extend: To make a document valid for a longer period To honor: To pay a bill when due

Irrevocable credit: A credit which cannot be cancelled Payer: One who pays

Payee: One who receives

To present: To send a B/E to the drawee for payment

To protest: To notify publicly the non-payment of a B/E so that legal action may be taken

To remit: To send money

Security: Documents or valuables given as cover for loan To surrender: To hand over, or give up, documents Valid: Effective; in order; having force

Current account: The account into which a client pays his trading receipts and on which he draws his cheques. No interest is paid on a current account. Banks make charges for handling these accounts unless an agreed minimum balance is kept in over an agreed period of time

Cheque: An order in writing from a person to pay on demand a certain sum to a named person

Bill of Exchange: An order in writing from one person to a bank or to another person, to pay on demand or at a given date, a certain sum to the person named in the bill

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Letter of credit: An arrangement with a bank by means of which a buyer guarantees payment to a seller on fulfillment by the seller of certain agreed conditions. The instruction must be in writing and if marked “irrevocable”, it cannot be cancelled

Draft: This really means a document used to “draw” money from some source, but sometimes it is used to refer to the money itself. A bill of exchange is often referred to in a letter as “the draft”

Banker’s transfer: Transfer of money from the bank account of a debtor to the bank account of his creditor by order of the debtor

REMEMBER THE FOLLOWING EXPORT-IMPORT PROCEDURE:

1.Seller and Buyer conclude a sales contract, with method of payment usually by letter of credit (documentary credit)

2.Buyer applies to his issuing bank, usually in Buyer©s country, for letter of credit in favor of Seller (beneficiary).

3.Issuing bank requests another bank, usually a correspondent bank in Seller©s country, to advise, and usually to confirm, the credit.

4.Advising bank, usually in Seller©s country, forwards letter of credit to Seller informing about the terms and conditions of credit.

5.If credit terms and conditions conform to sales contract, Seller prepares goods and documentation, and arranges delivery of goods to carrier.

6.Seller presents documents evidencing the shipment and draft (bill of exchange) to paying, accepting or negotiating bank named in the credit (the advising bank usually), or any bank willing to negotiate under the terms of credit.

7.Bank examines the documents and draft for compliance with credit terms. If complied with, bank will pay, accept or negotiate.

8.Bank, if other than the issuing bank, sends the documents and draft to the issuing bank.

9.Bank examines the documents and draft for compliance with credit terms. If complied with, Seller©s draft is honored.

10.Documents release to Buyer after payment, or on other terms agreed between the bank and Buyer.

11.Buyer surrenders bill of lading to carrier (in case of ocean freight) in exchange for the goods or the delivery order.

Answer the following questions:

1.Who faces risks in an export transaction?

2.What problems of payment do you know?

3.How is payment in foreign trade made?