Chapter 8-Drafts and Acceptances

ĐẠI HỌC FPT CẦN THƠ Chapter 8: Drafts and Acceptances Edward G Hinkelman International Payment 4th Edition World Trade Press Drafts In documentary transactions sellers make a written demand upon either a bank or the buyer to pay for the shipment of goods This demand accompanies the documentation package the seller presents to the bank Such a formal written demand for payment is called a "draft." Chapter 8: Drafts and Acceptances Drafts The formal definition of draft is: An unconditional order in writing, signed by a person (drawer) such as a buyer, and addressed to another person (drawee), typically a bank, ordering the drawee to pay a stated sum of money to yet another person (payee), often the seller, on demand or at a fixed or determinable future time The most common versions of drafts are: (1) SIGHT DRAFTS which are payable when presented, and (2) TIME DRAFTS (also called usance drafts) which are payable at a future fixed (specific) date or determinable (e.g., 30, 60, 90 days) date Chapter 8: Drafts and Acceptances Acceptances An acceptance is a time draft that has been accepted and signed by the drawee (the buyer or the bank) for payment at maturity If a time draft is accepted by a buyer of merchandise, it is called a TRADE ACCEPTANCE If a time draft is accepted by a bank it is called a BANKERS' ACCEPTANCE Chapter 8: Drafts and Acceptances Acceptances In most cases, obviously, a draft accepted by a bank enjoys higher credit standing than a draft accepted by a company or individual, since a bank is presumed to meet its obligation at maturity, and a company or individual in a foreign country may not as readily comply with its obligation Chapter 8: Drafts and Acceptances Holding or Discounting Acceptances In documentary transactions, the seller has two options: (1) once the seller's time draft is accepted The seller may either hold it until maturity and collect full face value, or (2) discount the draft, most likely with the accepting bank, and take the net value in cash immediately  Trade and bankers' acceptances often represent the easiest, least expensive way for a seller to provide credit to a buyer, while enjoying the security provided by the documentary transaction Chapter 8: Drafts and Acceptances Financing Transactions using Acceptances  Foreign buyers may indicate that they wish to provide a time documentary credit (rather than a sight documentary credit) but agree either to allow the seller to up the sales price slightly so as to offset the acceptance commission and discount costs or to absorb the acceptance commission and discount charges the bank will apply when discounting the draft at the request of the seller Chapter 8: Drafts and Acceptances Financing Transactions using Acceptances  In either case, the buyer and the buyer's bank will absorb the charges involved, and the seller will receive the full contract sales amount  Since the charges are usually lower than conventional financing charges, the buyer is still better off than if financing had been obtained through a bank loan Chapter 8: Drafts and Acceptances Financing Transactions using Acceptances Chapter 8: Drafts and Acceptances Financing Transactions using Acceptances Chapter 8: Drafts and Acceptances 10 "Clean" Acceptances A "clean" acceptance is one that does not have any notations attached that would compromise its value In a trade acceptance the customer promises to pay the bank the full amount of the draft no later than the date of maturity, or upon demand of the bank The accepted draft, when discounted, becomes a negotiable instrument that can be sold in the acceptance market, which is an over-the-counter market of brokers, dealers, and banks Chapter 8: Drafts and Acceptances 11 "Clean" Acceptances (cont.) Bankers acceptances are generally short-term, that is up to 180 days Bankers' acceptances become money market instruments once they are accepted by a major bank, which means that the bank has undertaken to honor this short-term note at its maturity Because of this characteristic, bankers' acceptances often result in a lower financing costs The difference can range from to percent depending on the transaction and the bank involved They are important sources of financing Chapter 8: Drafts and Acceptances 12 Difference between Letter of credit and Drafts Letter of Credit Bank issues Letter of Credit on behalf of the importer assuring payment to the exporter upon presentation of the shipping documents to the bank Chapter 8: Drafts and Acceptances Drafts Draft or Bill of Exchange is drawn by the exporter instructing the importer to pay face value of the draft on sight or at certain time in future 13 Difference between Letter of credit and Drafts Letter of Credit If the documents are in compliance with the terms of L/C, Bank is liable to pay the seller/exporter regardless of the buyer’s ability or willingness to pay Chapter 8: Drafts and Acceptances Drafts Banks act as intermediaries in processing the documents and the collection of payment for the exporter 14 Difference between Letter of credit and Drafts Letter of Credit Importer’s bank is obligated to make payment to the exporter on behalf of importer if presented documents are fully complied with the terms of L/C Drafts Importer has three options after examining the documents: To pay immediately in case of Sight draft To pay at future date in case of Time draft Or to refuse to pay the draft Chapter 8: Drafts and Acceptances 15 Difference between Letter of credit and Drafts Letter of Credit Payment is made to the exporter only when shipment is made Drafts Sight draft: Payment is made on presentation of the draft to the importer Time draft: Payment is made by the importer on maturity of the draft Chapter 8: Drafts and Acceptances 16 Difference between Letter of credit and Drafts Letter of Credit Goods will be available to the buyer after payment Drafts Sight draft: Goods available to the importer after payment Time draft: Goods available to the importer before payment Chapter 8: Drafts and Acceptances 17 Difference between Letter of credit and Drafts Letter of Credit In case of L/C exporter has to face risk very little or none depending on the terms conditions & of LC Drafts Sight draft: If draft is unpaid, goods will have to dispose of Time draft: Exporter relies fully on buyer to pay draft at maturity Chapter 8: Drafts and Acceptances 18 Difference between Letter of credit and Drafts Letter of Credit Importer is assured that shipment is made Drafts Sight draft: It is assured that shipment is made Time draft: It is assured that shipment is made Chapter 8: Drafts and Acceptances 19 Difference between Letter of credit and Drafts Letter of Credit Drafts Sight draft: Importer fully relies on exporter to ship goods as described in documents Because bank doesn’t deal in goods Chapter 8: Drafts and Acceptances Importer fully relies on exporter to ship goods as described in documents Importer might have an option to inspect goods before payment Time draft: Relies on exporter to ship goods as described in documents Importer might have an option to inspect goods before payment 20 ĐẠI HỌC FPT CẦN THƠ End of chapter ... bank loan Chapter 8: Drafts and Acceptances Financing Transactions using Acceptances Chapter 8: Drafts and Acceptances Financing Transactions using Acceptances Chapter 8: Drafts and Acceptances. .. brokers, dealers, and banks Chapter 8: Drafts and Acceptances 11 "Clean" Acceptances (cont.) Bankers acceptances are generally short-term, that is up to 180 days Bankers' acceptances become money... commission and discount costs or to absorb the acceptance commission and discount charges the bank will apply when discounting the draft at the request of the seller Chapter 8: Drafts and Acceptances