What
if the importer cannot arrange L/C?
There are cases when traders do business without
L/C terms. For instance, a buyer may not be able
to obtain a L/C from his bank due to tight regulations.
Another reason is when the buyer resides in a country
where banks do not issue L/C at all. There are also
cases when the exporter does not need a L/C since
the buyer is a credible leading company or the importer's
good financial standing is very well known to the
exporter from the long standing business relationship.
Generally speaking, exporting to an unknown overseas
importer without L/C terms is rather risky, as there
is no guarantee against non-payment by the importer.
Nevertheless, there are two terms of settlement
through documentary collection without using L/C.
They are commonly called D/P (Documents against
Payment) terms and D/A (Documents against Acceptance)
terms.
What is D/P Terms?
Under D/P terms, the exporter ships the good and
presents the bill of exchange to his negotiating
bank together with B/L and other shipping documents.
Then, the bank may pay the exporter against the
documents, provided that there is a previous arrangement
between the bank and the exporter to do so.
However, in most cases, the bank does not pay
the exporter immediately, but mails the documents
to its correspondent bank (reimbursing bank/collecting
bank) in the importer's country. The reimbursing
bank then notifies the importer on the arrival
of the documents. When the importer pays the bill
of exchange at the reimbursing bank, the bank
notifies the negotiating bank in the exporter's
country to confirm payment from the importer.
On the receipt of this notice, the negotiating
bank pays the exporter and the settlement is finished.
This way of settlement is called "Collection
of Documentary Bill of Exchange" which is
explained more in detail in the next section.
It should be noted that this method of settlement
entails certain risks for the exporter. For instance,
if the importer does not pay the bill of exchange
and refuses to accept delivery of the goods, the
exporter has to dispose of the goods in a foreign
country. Therefore, the exporter may have to find
another buyer either in the designated country
or elsewhere. Even if he does find another buyer,
he may have to sell his goods at a lower price.
In addition, the exporter has to bear the cost
of insurance and storage of the goods until they
are disposed.
What is D/A terms?
Using D/A terms, the exporter gives a grant of
deferred payment to the importer. If the exporter
is assured of the importer's integrity, he may
grant him a credit facility. The process for D/A
up to the arrival of the documents at the reimbursing
bank in the importer's country is the same as
that of D/P. After the reimbursing bank notifies
the importer on the arrival of the documents,
the importer checks the documents and agrees on
payment (promises to pay at a later date), then
the bank hands over the documents to the importer.
What is Usance Bill?
Under D/A terms, the exporter draws the bill of
exchange with grant of credit terms called "Usance
Bill" on the importer. "Usance"
means the time limit for the drawee to honour
the bill. With this arrangement, the importer
is allowed a grace period for the payment (from
30 to 180 days later after sight). This method
poses a great advantage for the importer, because
he can sell the goods during the credit period
and pay later. However, for the exporter, this
is even more risky than D/P terms due to obvious
reasons.
How does Trust Receipt
function?
In the case of settlement on D/A terms (usance
terms), the importer is allowed to delay the payment
for such a period of 30, 60, or 90 days after
seeing the documents including B/L. Theoretically,
during this grace period, he is allowed not to
execute payment at the reimbursing bank (collecting
bank), though he cannot receive the documents
from the bank, for as a rule, the documents are
handed over to the importer in return for payment.
This means that the importer cannot receive the
goods from the shipping company as goods are only
released upon submission of the documents.
Under such circumstances, the bank will release
the documents to the importer on condition that
he submit the T/R (Trust Receipt) to the bank.
The T/R is a document which certifies that the
importer recognises the goods as the bank's own
property until the bank is paid. In this way,
he can take possession of the goods from the shipping
company in exchange for the documents, and sell
the goods to the buyer, and eventually pay to
the bank within the said grace period.
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