MODES OF PAYMENT

In international trade, the main methods of payment are remittance, collection and letter of credit.

Remittance and collection belong to commercial credit, but letter of credit belongs to banker’s credit. The word {credit} here means who takes the responsibility of paying money and surrendering the shipping documents. So in remittance and collection transaction, the buyer is responsible for making payment, the seller for surrendering the shipping documents. In L/C transaction, however, the banker is responsible for paying money and tendering the shipping documents on behalf of both parties (the seller and buyer).

As far as the seller’s benefit is concerned, L/C is better than collection, and collection is better than remittance.

I-    Remittance:

Remittance means that the buyer remits money to the seller through a bank on his own initiative.

According to the terms and time stipulated in the contract, remittance is classified into three kinds:

     1- Mail Transfer (M/T):

The buyer gives money to the local bank which sends a trust deed for payment to its correspondent bank at the seller’s end by mail and entrusts the work to it to pay money to the seller.

2- Telegraphic Transfer (T/T):

At the request of the buyer, a local bank sends a trust deed for the payment by cable directly to its correspondent bank at the seller’s end and entrusts the work to it is to pay money to the seller.

1-   Demand Draft (D/D):

The buyer buys draft from a local bank and sends it by mail to the seller, the seller or his appointed person can collect money from the relative bank at his end against the draft sent by the buyer.

In our foreign trade, once the remittance is adopted, most of business is done through M/T or T/T, the seller prefers to use T/T, and the buyer prefers to use M/T. The main reason is that the seller, under T/T, can get money at an early date, speed up the turnover of funds, increase the income of interest and avoid the risk of fluctuations in exchange rate; the buyer, however, has to pay more cable expenses on bank charges. So in the case that T/T has to be used in the trade, T/T must be definitely stipulated in the contract so as to distinguish the responsibility between the buyer and the seller.

In import and export business transactions, the following methods of settlement are sometimes used. Shipment first, settlement later; cash with order, cash before shipment.

“Shipment First, Settlement Later” method, which is mainly used in our export business, means that the seller hands over the shipping documents or goods to the buyer before receipt of the money. Then the buyer makes the payment on his own initiative.

This method is of much benefit to the buyer because he cannot only save the money, but also gets the goods at the early date. If the financial standing of the buyer is reliable or he has special business relations with the sellers, the seller can adopt it, because the export volume can be expanded by this method.

“Cash with Order” method, which is mainly used in some special commodities, means that the buyer sends cash or banker’s draft with his order to the seller. The main reason is that the buyer is willing to use this method for fast-selling goods and rare articles, for he wants to get supply of them prior to other.

“Cash before Shipment” stands for that the buyer remits the full amount of money to the seller upon receipt of which, the seller ships the goods to the buyer. This method usually appears in transaction in small amount.

Trust Receipt:

Sometimes importers buy goods on D/P collection terms for resale to a third party in the same country. It can happen that the importer requires finance to bridge the gap between payments of the sight draft, and receipt of funds from the ultimate buyer. In such cases, the importer’s bank may provide credit facility to importer.

At first, the importer hands in a letter of pledge to importer’ s bank, and states that the documents, and/or goods are pledged as security to the bank. Against letter of pledge, the bank deals with the payment of the sight draft and the warehouse of goods.

The goods remain in the warehouse until the time comes, the importer must sign a trust receipt, which states that the importer holds the goods as trustee for the bank. The bank will then issue a delivery order to enable the importer to obtain the goods and take them to the ultimate buyer. The bank has now lost physical control of the goods and relies on the importer to deliver them to the ultimate buyer. Finally, the ultimate buyer pays directly to the bank.

Trust Deed     :  A formal document that creates the trust. It states the purpose and term of the trust and the names of the trustee and beneficiary.

II-   Collection:

Normally, the buyer does not remit the purchase price, but allows the exporter to draw a bill of exchange with or without documents attached on him. In such case, the exporter asks his bank to arrange for the acceptance or payment of bill overseas, and the bank will carry his task through its own bank office abroad or a correspondent bank. This procedure is formed as Collection of Proceeds of Sales.

1- Collection on Clean Bill:

It means that the exporter collects the purchase price against the draft only, without any shipping documents attached thereto.

2- Collection on Documentary Bill:

It means that the exporter collects the purchase price against the documentary bill. It can be subdivided into two kinds:

Documents Against Payment D/P at Sight:

	E		D		C
	A		G
							F
							B

Explanation:

A-     After shipment, the exporter applies to the remitting bank for collecting the invoice value by sending an application, a sight bill and shipping documents to the remitting bank.

B-    The remitting bank draws up a collection order and transfers it as well as the sight bill and shipping documents to the collecting bank.

     C- The collecting bank presents the draft and shipping documents to the importer according to the instructions in the collecting order.

     D- The importer pays the purchase price at sight to the collecting bank.

     E-  The collecting bank delivers the documents to the importer.

     F-  The collecting bank transfers accounts to the remitting bank.

G-       The remitting bank transfers accounts to the exporter.

Explanation:

A-        After shipping, the exporter applies to the remitting bank for collecting the invoice value by sending an application, a time draft and the shipping documents to the remitting bank.

     B-  The remitting bank draws up a collection order and transfers it as well as the time draft and shipping documents to the collecting bank.

     C-  The collecting bank presents the drafts and shipping documents to the importer and the importer accepts the draft.

D- The importer pays in due course to the collecting bank.

     E-   The collecting bank delivers the documents to the importer.

     F-   The collecting bank transfers account to the remitting bank.

     G-  The remitting bank transfers accounts to the principle.

     After shipment of the goods, the exporter shall draw an usance bill of exchange and send it as well as shipping documents to a local bank, through which and whose correspondent bank the document draft is presented  to  the importer. The importer shall accept the usance draft, and make payment on the due date of the usance bill under D/P after sight, the importer is given a certain period to make payment such as 30, 45, 60 or 90 days after the first presentation of the documents but he is not allowed to get hold of the documents until he pays.

A bill of exchange sent by an exporter with other shipping documents to an agent who will not release the documents until the bill of exchange has been signed (accepted) by the person receiving the goods. This is used when the bill of exchange is a period bill, and must be paid by a specific date. The documents against acceptance bill was signed by the consignee.

	D		C					A		F
					B
					E

Explanation:

     A-   After shipment, the exporter applies to the remitting bank for collecting the invoice value by sending an application, a time draft and shipping documents to the remitting bank.

     B-  The remitting bank draws up a collection order and transfers it as well as the time draft and shipping documents to the collecting bank.

     C-  The collecting bank presents the draft and documents to the importer. After the importer accepts the draft, the bank will deliver the shipping documents to the importer, while taking back the draft.

     D-  The importer pays the purchase price in due course to the collecting bank.

     E-   The collecting bank transfers accounts to the remitting bank.

F-        The remitting bank transfers account to the principle.

D/A is always after sight, D/A makes the importer to get hold of shipping documents and take delivery of goods before payment, so the exporter would have to take great risks.

III- Letter of Credit (L/C):     top

     The most commonly used method of payment in the financial business of international trade is the letter of credit which is reliable  and  safe  method  of  payment,  facilitating trade between

     unknown parties and giving protection to both the seller and the buyer.

Standard     Chartered                        Documentary Credit Instruction Detail Report

NON-NEGOTIATBLE

Issue Date          :  5/28/99

To                     :  STANDARD CHARTERED BANK                From             : Foreign Trade Bank of Cambodia

                           (TRADE-SG)                                                                  24, PREAH NORODOM BLVD.

                           SP                                                                               PHNOM PENH, CAMBODIA

Applicant           :  CHAMREOUN PEANICH CO., LTD.            Beneficiary    : CHIA KHIM LEE FOOD Industries

                           No. 197Eo, KAMPUCHEA KROM,                                     PTE.LTD. No. 119 DEFU LANE 10

                           PHNOM PENH, CAMBODIA.                                           SINGAPORE 539230

                                                                                                              TEL: 2856488

We hereby issue our Irrevocable Documentary Letter of Credit 995-121 im29

For                    :  USD 94,000.00

                           U.S. DOLLARS                        NINETY FOUR THOUSAND AND 00/100

Amount Modifier:   Maximum credit amount

Credit available against the documents detailed herein and beneficiary’s drafts in duplicate at Sight Drawn on

OURSELVES

Documents required:

1-       COMMERCIAL INVOICE IN 4 COPIES

2-   FULL SET OF CLEAN (SHIPPED ON BOARD) OCEAN BILL OF LADING

      MADE OUT TO ORDER BLANK ENDORSED MARKED (FREIGHT PREPAID)

      AND NOTIFY THE (ACCOUNTEE) IN 3 ORIGINAL PLUS 3 COPIES.

3-   PACKING LIST IN 4 COPIES.

4-   CERTIFICATE OF QUALITY AND QUANTITY IN 4 COPIES.

5-   CERTIFICATE OF ORIGIN 4 COPIES.

6-   INSURANCE POLICY IN ASSIGNABLE FORMS BLANK ENDORSED

      COVERED ALL RISKS IN 110 PCT OF INVOICE VALUE IN 4 COPIES.

DRAFT DRAWN UNDER THIS CREDIT MUST BE MARKED (DRAWN UNDER

FOREIGN TRADE BANK OF CAMBODIA L/C No. 995-121 IM29) WE HEREBY

ENGAGE WITH THE DRAWERS ENDORSERS AND BONAFIDE HOLDERS OF

DRAFT DRAWN AND REPRESENTED IN ACCORDANCE WITH THE CREDIT

TERMS THAT SUCH DRAFT WILL BE DULY HONOURED ON PRESENTATION.

Documents Presentation Period:

Documents to be presented within 14 days after the date of issuance of the shipping documents but within the validity of the Credit.

Merchandise Description:

-          100 M/T LION GLOBE BRAND MONOSODIUM

GLUTAMATE (LARGE CRYSTAL) (-8+20 MESH)

PURITY 99 PCT UP MOISTURE MAX 0.5 PCT USD 940/MT USD 94,000.00

                           -----------------------------------

PACKING: IN WOVEN PP BAGSS OF 25KG EACH

Shipping Terms  :  CIF                                        Cost, Insurance and Freight

Shipment/Dispatch taken in Charge:

From                 :  ANY INDONESIA PORT

To                     :  SIHANOUKVILLE PORT

Shipment to be effected no later than: 7/15/99

Expiry Date        :                             7/31/99                                   AT: SINGAPORE

________________________________________________________________________________________________________________________

                                                5/28/99            9:35:08 AM                        PAGE: 1 OF 2   

     1- The Feature Common to all Kinds of L/C:     top

     The feature common to all kinds of L/C is that the buyer arranges with a bank to provide finance for the exporter in the country of the latter on delivery of the shipping documents. On presentation of shipping documents, the banker will pay the purchase price, normally by paying a sight bill on presentation or by accepting a time bill drawn on the buyer.

       2- The Parties Relating to a Letter of Credit are named as follows:

A-         The applicant, generally the buyer or importer, who applies to the bank for issuance of letter of credit.

     B-   The original bank or issuing bank, which is the bank receiving the application from the applicant to issue the L/C and will be responsible for payment. It is usually a bank at the place where the importer’s premises are located.

C-   The advising bank or correspondent bank which is a bank at the place where the exporter resides and may usually be a branch of the issuing bank or its correspondent. The advising bank hands the letter of credit to the exporter under the instructions from the issuing bank. It only proves the authenticity of the L/C and is not responsible for anything else.

     D-   The beneficiary, who is empowered to use the L/C and usually the exporter.

       E-   The negotiating bank, which is a bank ready to accept or discount the documentary bill drawn by the beneficiary under the L/C. The negotiating bank may be the advising bank or another bank appointed to negotiate under the L/C. If there is no specific stipulation in the L/C, the exporter may present the document bill to any bank which is ready to put through the transaction.

     F-   The paying bank, which is a bank responsible for the payment specified in L/C. It is usually the issuing bank or it may be another bank appointed by the issuing bank according to the stipulation in the L/C.

3- Where Payment under a Banker’s Commercial Credit is Arranged, Four Stages Can Normally be Distinguished:

     A-   The exporter and the oversea buyer agree in the contract of sale that payment shall be made under a commercial credit.

B-         The oversee buyer instructs a bank at his place of resident (the originating bank) to make available a commercial credit for another country’s exporter on the terms agreed in the contract of sale.

C-         The originating bank arranges with a bank at the resident of exporter (known as the advising bank) to negotiate, accept or pay the exporter’s draft upon delivery of the shipping documents by the seller.

     D-   The advising bank advises the exporter that it will negotiate, accept or pay his draft upon delivery of the shipping documents.

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