Methods of Payment

There are four basic methods of payment - each providing varying degrees of security for the exporter.

Payment in advance. Clearly the best possible method of payment for the exporter is payment in advance. Cash with Order (CWO) avoids any risk on small orders with new buyers and may even be asked for before production begins However, this form of payment is extremely rare in exporting since it means that an overseas buyer is extending credit to an exporter - when the opposite procedure is the normal method of trade.

Variations of this form of payment are Cash on Delivery (COD) where small value goods are sent by Post Office parcel post and are released only after payment of the invoice plus COD charges.

Open account. An exporter receives the greatest security of payment from cash with order or from cash on delivery. At the other extreme, payment on open account offers the least security to an exporter.

A bill of exchange (which is also referred to as a draft) is legally defined as "an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to, or to the order of, a specified person.

The bill is called a sight draft if it is made out payable at sight, i.e. "on demand". If it is payable "at a fixed or determinable future time" it is called a term draft, because the buyer is receiving a period of credit, known as the tenor of the bill. The buyer signifies an agreement to pay on the due date by writing an acceptance across the face of the bill.

Letters of Credit. In any international trade transaction security is of prime importance to both importer and exporter. The exporter wants to ensure that payment will be made for any goods supplied, while the importer wishes to be satisfied that payment will be made only after dispatch of the goods. By using a letter of credit (also known as a documentary credit) both parties have a considerable degree of security in the commercial contract because it is honoured through the banking system.

An irrevocable letter of credit may be defined as an undertaking by an issuing bank (the importer's bank) to an exporter, through an advising bank, normally in the exporter's country, that the issuing bank will pay for the goods, provided the exporter (the beneficiary) complies precisely with all the terms and conditions of the credit.

Irrevocable credits can be either confirmed or unconfirmed, offering varying degrees of security for an exporter. An unconfirmed irrevocable credit is a commitment on the part of the issuing bank in the overseas country, whereas a confirmed irrevocable credit constitutes an undertaking on the part of the confirming bank as well as that of the issuing bank.

Text 4

Read the text. Draw the tree- diagram of the text. Be ready to summarize the text according to the diagram.

Trade Contract

Care must be taken in negotiating contracts for the purchase of raw materials and products, and the importing company should, whenever possible, take legal advice before signing an agreement which could conceivably contain clauses not in the best interests of the importer. Because of the hundreds of thousands of contracts for regular merchandise that are concluded internationally in the course of a year, most traders use one or other of the standard sets of contract conditions that have been proved and tested for that purpose. The British Importers Confederation has issued a list of the most important items to be included in any contract. These take in:

Description. A clear description of the goods, their price and quality must be given in detail.

Price. This might cover more than the cost of the goods, and unless agreed in advance importers could find transport, insurance and other items included in the price.

Specifications. These must comply with UK regulations, particularly those relating to standards, health, safety, agriculture and defense.

Payment. Not only the method of payment (in advance, by open account, by collection or by letter of credit) but also the due date of payment must be included.

Packing. It is essential that the goods are transported, marked, packed and stored correctly and in such a manner as to be fully protected –. whether they are carried by road, rail, ship or aircraft. Packing must conform to international standards and must comply with Customs regula­tions.

Transportation. The method is an important consideration, especially if it is included in the price of the goods, so that the alternative methods must be investigated. Much will depend, however, on the type of product and the variety of transport available from the point of supply.

Delivery. Whether the goods are delivered in one consignment or by instalments over a set period, the date(s) and quantity must be stipulated in the contract. It is also advisable to include an inspection clause. This will give time following the arrival of the goods for an inspection and a claim for compensation if they are not in order.

Insurance. Whether insurance is the responsibility of the supplier or the importer must be decided in advance. Proper insurance cover, for the whole period and the different stages of transportation, is vital.

Law. Included in the contract must be the law of the country under which it will be enforced - preferably this should be English Law.

Text 5

Read the text. Translate the words and expressions given both in bald and italics. Write down 15 statements (both true and false) and let the class identify them and correct the false ones. Be ready to explain the difference between elastic and inelastic demand.