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 in the seller's country. It is merely necessary for the buyer or a debtor to send a letter of instruction to his bank—or 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)

The full story of the bill of exchange is too long for inclusion in this book and the reader should study it in one of the many works in English on commercial practice.

In brief, 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 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 (i.e. front) of the bill, together with the date. The bill now becomes legally binding, and the acceptor must meet it on or before 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 ban!: 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.

No ’01 £169 00 London 20^th August 1997

60 Days after sight of this first of

Exchange (second and third of the same tenor and

date unpaid) pay to the order of

Modern Implements Ltd

One hundred and sixty nine pounds

Value received payable at the current rate of

Exchange for Bankers sight drafts on London

To L.Peterson Ltd. For and on behalf on

Copenhagen MODERN IMPLEMENTS LTD.

Director J.J.Smith

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 on to the new holder.

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

1. Sell it to a bank, which will pay lace 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 said 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. (See end of this chapter for special terminology)

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 easy, 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 used in financing foreign trade, the student will realise the vital part played by banks; without them, modem 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.

Note: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.

Form 99 (1975) Duplicate to Overseas. Dept. Import Credits Section London/Chief Accountant’s Dept..

See notes Head Office (delete as appropriate)

on reverse

TO LLOYDS BANK LIMITED Advise by: Airmail/Telex or Urgent/Ordinary/Cheap Ratе Cablе quoting full/brief details

Please open on our account a Credit in the following terms: