LC Payment methods: BY ACCEPTANCE; BY NEGOTIATION; BY DEF PAYMENT; BY MIXED PAYMENT. terms in letter of credit

Knowledge Statement

 Knowledge of Types of Payment: Sight, Deferred, Acceptance

Goal

 The goal of this material is to introduce you to the types of payment opportunities for international business transactions and the ways each affects the timely payment for the sale of goods and/or services, including an understanding of how and when each type of payment is utilized with the methods of payment available for international transactions.

Learning Objectives

 You will be able to

• identify the types of payments available for international transactions.
• identify how each type of payment can be used.
• identify how each type of payment affects the collections of funds.

Introduction

 Documentary credits and/or letters of credit are banking tools used to alleviate various levels of risk related to international business transactions. In addition to the many forms of credit including but not limited to irrevocable, confirmed, transferable, revolving, and standbywith each credit instrument the timing for payment must be identified. These include sight, deferred payment, acceptance and negotiation. In addition there is also much flexibility for a buyer and seller to negotiate the terms for payment. To understand this process, an international manager must be comfortable with the terminology and definitions of the parties and actions associated with this banking instrument, including but not limited to terms such as: applicant, beneficiary, issuing bank, advising bank, discrepancy and amendment.

Types of Payment

 (At) Sight

This type of payment indicates immediate payment to the buyer after

• presentation of sight draft (bill of exchange)
• presentation of conforming documents
• the stipulated (advising, confirming or issuing) bank has had reasonable time to examine documents
• the documents are found to be in order

It is important to recognize that "immediate" does not mean within hours, but within a reasonable period of time. To be on the safe side, it is wise to anticipate a minimum of 72 hours/3 business days after the above steps have taken place.

Deferred Payment

 In this situation, payment is made to a buyer at a specified or determinable future date stipulated in the letter of credit or documentary collection, providing that the documents are found to be in order. An example is 60 days after date of transport document or invoice date. No draft is called for under this type of payment. It is important to remember that a buyer will have credit/collateral/cash tied up until payment is made; and if a deferred payment is made through a letter of credit, it is guaranteed to a seller just as if it were made immediately. The risk increases for a seller if the remitting bank is located in a risky country.

Acceptance

The payment type known as an acceptance is similar to a deferred payment. In this case, however, a "term" or "usance" draft is presented together to a stipulated bank along with the other required documents. Once the documents and draft are accepted, then the draft will be drawn on and payable at a future date as stipulated in the letter of credit. For example 30 days' sight would mean payment will be made to the seller 30 days after "sight" (the remitting bank has looked at, reviewed and accepted) of the documents.

Negotiation

 In regard to letters of credit, when the documents are presented and reviewed by the bank, the process is referred to as negotiation of the documents. In accordance with UCP 600, a bank authorized to negotiate documents/drafts is authorized to give value for draft (s) and/or document(s), which means the letter of credit can stipulate that payment be made by the advising, issuing or confirming bank. For the purposes of the UCP, the interpretation is either "making immediate payment" or "undertaking an obligation to make payment" (on the due date).

Summary

 Having completed this lesson, you should now understand the types of payments available for use in international transactions. Once agreed upon, the type of payment should be clearly stated to the customer to avoid confusion as most of the payment types work with many of the methods of payment. Clarifying this before the transaction is completed will allow for timely payment and may help both the buyer and seller avoid unnecessary banking costs.

Resources

 Exporting from Start to Finance, Third Edition, L. Wells and K. Dulat.
The Global Entrepreneur, James Foley, 2nd Edition, Jamric Press, 2004.
International Chamber of Commerce - www.iccwbo.org
ICC Resources - www.iccbooksusa.com

A sight LC causes payment to be made immediately to the beneficiary/seller/exporter upon presentation of the correct documents. A time or date LC specifies when payment is to be made at a future date and upon presentation of the required documents.

An LC at sight is a letter of credit (LC) that is payable immediately – more or less – after the seller meets the requirements of the letter of credit. This type of LC is the quickest form of payment for sellers (sellers are typically exporters, and they might expect payment within 7 to 10)

Why use a Sight LC?

A letter of credit that pays at sight is beneficial for sellers. Payment arrives more quickly than it would with a deferred payment letter of credit. Exporters spend money to produce and ship goods, so getting funds quickly helps them avoid a cash-flow crunch

The Opposite of a Sight LC: deferred payment letter of credit

To understand how an LC at sight works, it might help to review how it doesn’t work. An alternative form of LC is a deferred payment letter of credit or a usance letter of credit. With those instruments, payment happens at some future point in time – long after the documents have been submitted (perhaps 30, 90, or 180 days after).

Deferred payment gives the buyer more time to come up with funds. As a result, it can serve as a form of seller-financing, which might help to attract buyers who would otherwise have to pay more quickly. The buyer also has a chance to sell the imported goods and generate revenue before the payment is due, making it easier to fund the payment (or shortening the amount of time that the buyer has to borrow from a bank).