GGBBEE –– WWEEEEKK 1111 6-3. Payment

Payment Instruments of GBT

As we have learned earlier, financial documents, also called instruments, are widely used in international trade and payment. They clearly record currency to certain extent, circulating among participants, facilitating the transfer of credits, acting as payment and credit tools in mechanise exchange. In GBT, the main instruments of payment are the currency and bills, i.e. bill of exchange (draft), promissory note, and cheque.

(i) Bill of Exchange

The bill of exchange or draft has played a vital part in the world’s commercial and financial life for some countries. Also, it is widely used for settlement in international trade. A bill of exchange or draft is an unconditional order in writing prepared by one party (drawer) and addressed to another (drawee) directing the drawee to pay a specialised sum of money to the order of a third person (the payee), or to the bearer, on demand or at a fixed and determinable future time.

In conjunction with the definition, Figure 18 Specimen: Bill of Lading may be dissected as follows: ① An unconditional order in writing; ② Addressed by one person/party (the drawer); ③ To another (the drawee); ④ Signed by the person (the drawer) giving it; ⑤ Requiring the person to whom it is addressed (the drawee or payor) to pay; ⑥ On demand, or at fixed or determinable future time; ⑦ A sum certain in money; ⑧ To, or to the order of, a specified person, or to bearer (the payee).

[Figure 18] Specimen: Bill of Exchange

2 / 27

(ii) Promissory Notes

A promissory note is an unconditional promise in writing made by one person (the maker) to another (the payee or the holder) signed by the maker engaging 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 or bearer. From definition of promissory note, it is easy to find that there is no accepter, only the maker and the other parties are payee, endorser, bearer and holder. The maker has prime liability while the other parties have second liability. Should the promissory note be made by two persons, then they are jointly and severally liable to the note according to its tenor.

Bill of treasuries, bank notes, etc., are daily used examples of promissory note. Main contents are stated as follows (please refer to Figure 19): ① The words “Promissory Note” clearly indicated; ② An unconditional promise to pay; ③ Name of the payee or his/her order; ④ Maker’s signature; ⑤ Place and date of issuing; ⑥ Tenor of payment; ⑦ A certain amount of money.

[Figure 19] Specimen: Promissory Note

(iii) Cheques

A cheque is defined as an unconditional order in writing drawn on a bank signed by the drawer, requiring a bank to pay on demand a sum certain in money to the order of a named person or to the bearer.

The meaning of the different parts of the definition is:

3 / 27

① Unconditional: Payment cannot hinge on certain conditions being met, e.g. “Pay Mr Patrick USD200 provided my salary cheque has been paid into my account”. ② Writing: It must be in writing, pen, ballpoint pen, print, even pencil can be used although the latter is not recommended because details can easily be altered. ③ Signed: A cheque must be signed by the drawer, who is the person paying the money. ④ On Demand: It is expected that the cheque will be paid as soon as it is presented to the other bank. ⑤ Certain Amount: The amount of the cheque must be definitive, both in words and figures. ⑥ Named Person or Bearer: The cheque must be payable to someone by name or payable to “the bearer”.

Basically, there are five essential elements in a cheque. They are mentioned as follows: ① Indicating the word “cheque” or “check”; ② Detailed name of the drawee, i.e. the paying bank; ③ Name and signature of the drawer; ④ Date and place of issuance; ⑤ Currency and a certain amount.

[Figure 20] Specimen: Cheques (I)

4 / 27

[Figure 21] Specimen: Cheques (II)

Methods of Payment

Nowadays, how to choose a certain payment method among them is the result through analysis and comparison and a contest for both buyer and seller. The main methods of payment introduced in this section are as follows: cash in advance, T/T payment in advance, open account, D/P, D/A, documentary letters of credit and documentary drafts, documentary collection (draft), documentary drafts, letters of credit (L/C).

[Figure 22] Flowchart of Exemplary International Payment Procedure (in China)

5 / 27

1. Cash in Advance

Receiving payment by cash in advance of the shipment might seem ideal. In this situation, the exporter is relieved of collection problems and has immediate use of the money. A wire transfer is commonly used and has the advantage of being almost immediate. Payment by cheque may result in a collection delay of up to six weeks. Therefore, this method may defeat the original intention of receiving payment before shipment.

Many exporters accept credit cards in payment for exports of consumer and other products, generally of a low currency value, sold directly to the end user. Domestic and international rules governing credit card transactions sometimes differ, so Korean merchants should contact their credit card processor for more specific information. International credit card transactions are typically done by telephone or fax. Due to the nature of these methods, exporters should be aware of fraud. Merchants should determine the validity of transactions and obtain the proper authorisations.

For the buyer, however, advance payment tends to create cash flow problems, as well as increase risks. Furthermore, cash in advance is not as common in most of the world as it is in the United States. Buyers are often concerned that the goods may not be sent if payment is made in advance. Exporters that insist on this method of payment as their sole method of doing business may find themselves losing out to competitors who offer more flexible payment terms.

2. T/T Payment in Advance

T/T means telegraphic transfer, or simply wire transfer. It's the simplest and easiest payment method to use.

T/T payment in advance is usually used when the sample and small quantity shipments are transported by air. The reason why is that the documents like air waybill (AWB), commercial invoice and packing list will be sent to you along with the shipment by the same plane. As soon as the shipment arrives, you can clear the customs and pick up the goods with the documents. As it's acknowledged, T/T payment in advance presents risk to the importer if the supplier is not an honest one.

It takes 3-4 days for us to received the wire transfer made from anywhere in the world.

3. Open Account

In a foreign transaction, an open account can be a convenient method of payment if the buyer is well established, has a long and favourable payment record, or has been

6 / 27

thoroughly checked for creditworthiness. With an open account, the exporter simply bills the customer, who is expected to pay under agreed terms at a future date. Some of the largest firms abroad make purchases only on open account.

However, there are risks to open account sales. The absence of documents and banking channels might make it difficult to pursue the legal enforcement of claims. The exporter might also have to pursue collection abroad, which can be difficult and costly. Another problem is that receivables may be harder to finance, since drafts or other evidence of indebtedness are unavailable. There are several ways to reduce credit risk, through such means as export credit insurance and factoring.

Exporters contemplating a sale on open account terms should thoroughly examine the political, economic, and commercial risks. They should also consult with their bankers if financing will be needed for the transaction before issuing a pro forma invoice to a buyer.

4. D/P (Documents Against Payment)

The exporter makes shipment and sends the shipping documents to the exporter's bank (e.g. the Bank of China) for collection. The Bank of China then sends the shipping documents along with a collection letter to the importer's bank, who then sends a collection notice to the importer. The importer makes payment upon receiving the notice, and only after payment does the importer receive the original shipping documents with which you take the physical possession of the goods.

The major advantage of the use of cash against documents payment is the low cost, versus using a letter of credit. But, this is offset by the risk that the importer will for some reason reject the documents (or they will not be in order). Since the cargo would already be loaded (to generate the documents), we have little recourse against the importer in cases of non-payment. So, a payment against documents (D/P) arrangement involves a high level of trust between the exporter and the importer.

5. D/A (Documents Against Acceptance)

The D/A transaction utilises a term or time draft. In this case, the documents required to take possession of the goods are released by the clearing bank only after the buyer accepts a time draft drawn upon him. In essence, this is a deferred payment or credit arrangement. The buyer’s assent is referred to as a trade acceptance.

D/A terms are usually after sight, for instance “at 90 days sight”, or after a specific date, such as “at 150 days bill of lading (B/L) date.”

7 / 27

As with open account terms, there are some inherent risks in selling on D/A:

‐ As with a D/P, the importer can refuse to accept the goods for any reason, even if they are in good condition. ‐ The buyer can default on the payment of a trade acceptance. Unless it has been guaranteed by the clearing bank, the seller will need to institute collection procedures and/or legal action.

6. Documentary Letters of Credit and Documentary Drafts

Documentary letters of credit or documentary drafts are often used to protect the interests of both buyer and seller. These two methods require that payment be made based on the presentation of documents conveying the title and those specific steps have been taken. Letters of credit (L/C) and drafts can be paid immediately or at a later date. Drafts that are paid upon presentation are called sight drafts. Drafts that are to be paid at a later date, often after the buyer receives the goods, are called time drafts or date drafts.

Since payment by these two methods is made on the basis of documents, all terms of payment should be clearly specified in order to avoid confusion and delay. For example, "net 30 days" should be specified as "30 days from acceptance." Likewise, the currency of payment should be specified as "US$30,000." International bankers can offer other suggestions.

Banks charge fees - based mainly on a percentage of the amount of payment - for handling L/C and smaller amounts for handling drafts. If fees charged by both the foreign and Korean banks are to be applied to the buyer's account, this should be explicitly stated in all quotations and in the L/C. The exporter usually expects the buyer to pay the charges for the L/C, but some buyers may not agree to this added cost. In such cases, the exporter must either absorb the costs of the L/C or risk losing that potential sale. L/C for smaller amounts can be somewhat expensive since fees can be highly relative to the sale.

7. Documentary Collection (draft)

Documentary collections are regulated by the Uniform Rules for Collections issued by the International Chamber of Commerce (URC 522). This document can also be obtained from the International Trade Department of your financial institution.

Documentary Collection or Draft is the term when you ship the goods before the payment is made and then draw a draft on the buyer, not on the bank, like under L/C. Under documentary collections banks have no responsibility for the payment.

8 / 27

There are two types of documentary collections - sight draft, also known as "Documents Against Payment (D/P)", and time draft, also known as "Documents Against Acceptance (D/A)".

(i) Sight Draft (or D/P)

"Sight draft" is payable by the buyer immediately after notification by the buyer's bank of the receipt of the draft and transport documents.

Under this method of payment you (the drawer) negotiate the terms with the buyer (the drawee), specify the documents required for the payment, ship the goods and draw the draft on the buyer. The draft and the documents required for the payment are presented to your bank (Remitting Bank) and after examination are forwarded to the buyer's bank (Presenting Bank). The Presenting Bank holds the title documents, i.e. usually the transport documents, and will release them to the buyer only after the payment was made.

Sight draft procedure is shown in the diagram below:

① The Drawer and the Drawee negotiate terms and conditions of the transaction. ② The Drawer ships the goods. ③ The Drawer draws a draft and presents it to the Remitting Bank along with other documents. ④ The Remitting Bank examines the documents and the draft and forwards them to the Presenting Bank. ⑤ The Presenting Bank notifies the Drawee of receipt of the documents. ⑥ The Presenting Bank holds the documents until the payment is made by the Drawee.

9 / 27

⑦ The Drawee examines the documents and makes the payment for the supplied goods. ⑧ The Presenting Bank releases the documents to the Drawee.

Sight drafts have some similarity with L/C. You deal with documents and through banks, and the buyer cannot take the possession of the goods before the payment is occurred.

However, the payment is not guaranteed. If the buyer for any reason refuses to pay, you have to deal with goods "on the water" or stacked in the customs zone in a foreign country. It can be very costly to ship your goods back or to sell them urgently. In both cases, there are substantial additional expenses, e.g. warehousing, cost of transportation to a new destination, and significant discount, etc. In some cases, the buyer who failed to pay was one of the bidders at the resulting auction and had bought the goods for a fraction of the initial price.

It is also possible, that the buyer will delay the payment. Although legally the payment has to be made immediately upon receipt of the draft by the buyer's bank, the buyer may hold the payment until the goods are delivered.

(ii) Time Draft (or D/A)

Unlike the sight draft, when dealing with time drafts, the buyer may take possession of the goods before the payment. Under the time draft, you agree on a deferring period, ship the goods and draw a draft. For the title documents to be released, the buyer has to accept the draft by issuing written evidence of his willingness to pay on the agreed maturity date, usually by signing and dating the draft.

Dealing with the 'time draft', always draw a draft against the certain date specified in the other document, e.g. "Payable at 60 days after invoice date/bill of lading date/the draft date".

The time draft, in fact, is very similar to "open account" terms – you have no control over the goods, nor over the payment. The only difference is that, in addition to the contract of sale, you have the buyer's written guarantee to make a payment on a certain date. You have to rely on the buyer. The consequences of the refusal to pay are the same as the consequences of the refusal to pay under "open account".

Drafts are normally issued in a set of two (First of Exchange and Second of Exchange) or singly (Sole Bill of Exchange). Two drafts are usually drawn to ensure that at least one draft reaches the drawee when they are dispatched separately. When two drafts are issued they may be numbered "1" and "2" and marked "First of Exchange (Second Unpaid)" and "Second of Exchange (First Unpaid)".

10 / 27

Documentary collection is cheaper then L/C but the risk involved is much greater, especially with the time draft. These terms are not recommended, unless you are dealing with a well-known trusted buyer or the transaction is insured.

8. Documentary Drafts in details

A draft, sometimes also called a bill of exchange, is analogous to a foreign buyer's cheque. Like cheques used in domestic commerce, drafts carry the risk that they will be dishonoured. However, in international commerce, title does not transfer to the buyer until he pays the draft, or at least engages a legal undertaking that the draft will be paid when due.

(i) Sight Drafts

A sight draft is used when the exporter wishes to retain title to the shipment until it reaches its destination and payment is made. Before the shipment can be released to the buyer, the original ocean B/L, i.e. the document that evidences title, must be properly endorsed by the buyer and surrendered to the carrier. It is important to note that air waybills (AWB), on the other hand, do not need to be presented in order for the buyer to claim the goods. Hence, risk increases when a sight draft is being used with an air shipment.

In actual practice, the ocean B/L is endorsed by the exporter and sent via the exporter's bank to the buyer's bank. It is accompanied by the sight draft, invoices, and other supporting documents that are specified by either the buyer or the buyer's country, e.g. packing lists, consular invoices, and insurance certificates. The foreign bank notifies the buyer when it has received these documents. As soon as the draft is paid, the foreign bank turns over the B/L thereby enabling the buyer to obtain the shipment.

There is still some risk when a sight draft is used to control transferring the title of a shipment. The buyer's ability or willingness to pay might change from the time the goods are shipped until the time the drafts are presented for payment; there is no bank promise to pay standing behind the buyer's obligation. Additionally, the policies of the importing country could also change. If the buyer cannot or will not pay for and claim the goods, returning or disposing of the products becomes the problem of the exporter.

(ii) Time Drafts and Date Drafts

A time draft is used when the exporter extends credit to the buyer. The draft states that payment is due by a specific time after the buyer accepts the time draft and receives the goods, e.g. 30 days after acceptance. By signing and writing "accepted"

11 / 27

on the draft, the buyer is formally obligated to pay within the stated time. When this is done the time draft is then called a trade acceptance. It can be kept by the exporter until maturity or sold to a bank at a discount for immediate payment.

A date draft differs slightly from a time draft in that it specifies a date on which payment is due, rather than a time period after the draft is accepted. When either a sight draft or time draft is used, a buyer can delay payment by delaying acceptance of the draft. A date draft can prevent this delay in payment though it still must be accepted.

When a bank accepts a draft, it becomes an obligation of the bank and thus, a negotiable investment known as a banker's acceptance. A banker's acceptance can also be sold to a bank at a discount for immediate payment.

9. Letters of Credit (L/C)

A letter of credit (L/C) adds a bank's promise to pay the exporter to that of the foreign buyer provided that the exporter has complied with all the terms and conditions of the L/C. The foreign buyer applies for issuance of a L/C from the buyer's bank to the exporter's bank and therefore is called the applicant; the exporter is called the beneficiary.

Payment under a documentary letter of credit is based on documents, not on the terms of sale or the physical condition of the goods. The L/C specifies the documents that are required to be presented by the exporter, such as an ocean B/L (original and several copies), consular invoice, draft, and an insurance policy. The L/C also contains an expiration date. Before payment, the bank responsible for making payment, verifies that all document conform to the L/C requirements. If not, the discrepancy must be resolved before payment can be made and before the expiration date.

A L/C issued by a foreign bank is sometimes confirmed by a Korean bank. This confirmation means that the Korean bank (the confirming bank), adds its promise to pay to that of the foreign bank (the issuing bank). If a L/C is not confirmed, it is advised through a Korean bank and thus called an advised L/C. Korean exporters may wish to confirm L/C issued by foreign banks if they are unfamiliar with the foreign banks or concerned about the political or economic risk associated with the country in which the bank is located. An Export Assistance Center or international banker can assist exporters in evaluating the risks to determine what might be appropriate for specific export transactions.

A L/C may either be irrevocable and thus, unable to be changed unless both parties agree; or revocable where either party may unilaterally make changes. A revocable L/C

12 / 27 is inadvisable as it carries many risks for the exporter.

A change made to a letter of credit after it has been issued is called an amendment. Banks also charge fees for this service. It should be specified in the amendment if the exporter or the buyer will pay these charges. Every effort should be made to get the L/C right the first time since these changes can be time-consuming and expensive.

To expedite the receipt of funds, wire transfers may be used. Exporters should consult with their international bankers about bank charges for such services.

(i) A Typical L/C Transaction

An irrevocable L/C is an often used payment method. It is often referred to an L/C. Letters of Credit are formal payment methods that offer a lot of protection to the parties.

Below are the typical steps of an irrevocable L/C that has been confirmed by a Korean bank: ① After the exporter and buyer agree on the terms of a sale, the buyer arranges for its bank to open a L/C that specifies the documents needed for payment. The buyer determines which documents will be required. ② The buyer's bank issues, or opens, its irrevocable letter of credit includes all instructions to the seller relating to the shipment. ③ The buyer's bank sends its irrevocable L/C to a Korean bank and requests confirmation. The exporter may request that a particular Korean bank be the confirming bank, or the foreign bank may select a Korean correspondent bank. ④ The Korean bank prepares a letter of confirmation to forward to the exporter along with the irrevocable L/C. ⑤ The exporter reviews carefully all conditions in the L/C. The exporter's freight forwarder is contacted to make sure that the shipping date can be met. If the exporter cannot comply with one or more of the conditions, the customer is alerted at once. ⑥ The exporter arranges with the freight forwarder to deliver the goods to the appropriate port or airport. ⑦ When the goods are loaded, the freight forwarder completes the necessary documentation. ⑧ The exporter (or the freight forwarder) presents the documents, evidencing full compliance with the L/C terms, to the Korean bank. ⑨ The bank reviews the documents. If they are in order, the documents are sent to the buyer's bank for review and then transmitted to the buyer. ⑩ The buyer (or the buyer's agent) uses the documents to claim the goods.

13 / 27

⑪ A draft, which accompanies the L/C, is paid by the buyer's bank at the time specified or, if a time draft, may be discounted to the exporter's bank at an earlier date.

(ii) Forms and Types of L/C

L/C is regulated by International Chamber of Commerce under the Uniform Customs and Practice for Documentary Credits (UCP 600). Sometimes it's difficult to understand what it means, as the document is drafted for the banking professionals and its language is very technical. Therefore, it is necessary to consult these terms with your local international bank. Any mistakes, unclear or incorrectly stipulated terms, even typos in a L/C may cost you dearly.

In "plain English", L/C is a conditional bank guarantee (or a bank’s undertaking) of payment for supplied goods. "Conditional" means that to get paid you have to present the bank-guarantor with documents, which strictly comply with the terms and conditions specified in the L/C.

There are different forms and types of L/C as follows: ① Revocable and Irrevocable L/C: "A revocable L/C may be amended or cancelled by the Issuing Bank at any moment and without prior notice to the Beneficiary." This is as simple, as that. Never accept this form of L/C in your export arrangements. Agree that the L/C is irrevocable before you go any further in your L/C negotiations. Although UCP 600 requires that L/C should indicate whether it is revocable or irrevocable, it also says "in the absence of such indication the Credit shall be deemed to be irrevocable". ② Confirmed L/C: When you export to a country with economical or political instability or if you are unfamiliar with the Issuing Bank, you should require that the L/C be confirmed by a first-class bank. If L/C is confirmed, the confirming bank is liable for the payment. ③ Transferable L/C: Transferable L/C is a perfect financial tool for middlemen to secure their margin without involving any funds. It allows dealing with more than one beneficiary. When a transferable L/C is issued in your favour, you can transfer it to your seller and use it as a payment. L/C "can be transferred only if it is expressly designated as "transferable". Transferable L/C must correspond with the original L/C, "with the exception of, i.e. the amount of the L/C, any unit price, the expiry date, the last date for presentation of documents, and the period for shipment; and any or all of which may be reduced or curtailed." ④ L/C payable at sight: "Payable at sight" means that you'll be paid "immediately"; in fact, it may take up to 5 days, after presentation of the documents stipulated in the L/C to the Issuing Bank or to the Confirming Bank if it was confirmed. 14 / 27

⑤ L/C payable on the maturity date: If deferred payment was agreed, you'll be paid on the maturity date indicated in the L/C after presentation of the documents stipulated in the L/C to the Issuing Bank. Don't forget to specify the date from which the deferring period starts, e.g. 90 days after date of transport document.

(iii) Process of Payment under L/C

The payments under L/C are usually made by the bank upon receipt of the documents stipulated in the L/C and a bill of exchange issued by you.

The bill of exchange (the draft) is an unconditional order in writing, signed and addressed by the drawer (you) to the drawee (the paying bank), requiring the drawee to pay the drawer a certain sum of money according to the terms of the L/C.

Under L/C, always draw the draft on the bank, not on the buyer. And there are at least four participants, when dealing with L/C, i.e. the buyer – the Applicant; You - the Beneficiary; Bank, the payment will come from – the Issuing Bank; Bank, the payment will go to – the Advising Bank.

The diagram below shows how participants are involved in the process of payment under L/C:

① The Applicant and the Beneficiary negotiate terms and conditions of the L/C. ② The Applicant applies to the Issuing Bank to issue the L/C. ③ The Issuing Bank issues the L/C and forwards it to the Advising Bank. ④ The Advising Bank checks the apparent authenticity of the L/C and advises the L/C to the Beneficiary.

15 / 27

⑤ The Beneficiary checks if the L/C complies with the commercial agreements and if all terms and conditions specified in the L/C can be satisfied and ships the goods. ⑥ The Beneficiary assembles the documents specified in the L/C, checks the documents for discrepancies with the L/C, draws the draft and presents the draft and the documents to the Advising Bank. ⑦ The Advising Bank bears the draft and the documents against terms and conditions of the L/C and forwards them to the Issuing Bank. ⑧ The Issuing Bank checks if the documents comply with the L/C and makes a payment immediately (if the L/C is available by sight) or on a certain date (if L/C is available by deferred payment).

Another party, which may be involved in the L/C procedure, is the Nominated Bank.

(iv) Parties Involved in the L/C Procedure ① The Advising Bank: The Advising Bank advises you that a L/C is received and available to you and informs you about the terms and conditions of the L/C. The advising bank is not responsible for the payment of the L/C. ② The Issuing Bank: The Issuing Bank is the key player in the procedure, the one who makes the payment. Try to negotiate with the buyer which bank will issue the L/C. Ask the Advising Bank if it has a corresponding bank in the buyer's country and suggest this bank to the buyer as the issuing bank. If the Advising Bank does not have a corresponding bank in the buyer's country, ask the bank to recommend you a well-known bank with high credit rating and insist your buyer has the L/C issued by this bank. The Advising Bank will be able to provide you with the information on financial status and credibility of the Issuing Bank. ③ The Nominated Bank: The Nominated Bank is the bank, which is authorised by the Issuing Bank "to pay, to incur a deferred payment undertaking, to accept Draft(s) or to negotiate." The Issuing Bank may authorise the Nominated Bank to negotiate the drafts and/or documents. Negotiation means that the nominated Bank – in this case the Negotiating Bank - gives value to such draft(s) and/or documents, not just examination of the documents.

(v) Confirmation of L/C

The confirmation of the L/C by another bank - the Confirming Bank - means that if the Issuing Bank refuses to make the payment, the Confirming Bank is responsible for this payment.

The best-case scenario is when the Advising Bank confirms the L/C. If the Advising

16 / 27

Bank does not agree to confirm the L/C, ask the bank to recommend you another bank to be the Confirming Bank.

Keep in mind that, according to UCP 600, "Branches of a bank in different countries are considered another bank." That means that Citibank in Poland, for instance, is an independent financial institution and has its own financial status and credit rating, which is very different compared with the rating of Citibank in Korea. If you are dealing with a buyer from a country with an unstable political or economical situation, always ask for the confirmation of the L/C.

There are additional charges for the confirmation of the L/C, which depend on the risk involved in dealing with the particular country. The responsibility to pay for the confirmation is negotiable and usually is paid by the buyer. However, if it wasn't agreed prior to the issuance of the L/C, you are the one who will pay for this service.

When L/C is to be confirmed the payment process is different and is shown in the following diagram:

① The Applicant and the Beneficiary negotiate terms and conditions of the L/C. ② The Applicant applies to the Issuing Bank to issue the L/C. ③ The Issuing Bank issues the L/C and forwards it to the Advising Bank. ④ The Confirming Bank confirms the L/C to the Advising Bank. ⑤ The Advising Bank checks the apparent authenticity of the L/C and advises the L/C to the Beneficiary. ⑥ The Beneficiary checks if the L/C complies with the commercial agreements and if all terms and conditions specified in the L/C can be satisfied and ships the goods. ⑦ The Beneficiary assembles the documents specified the Issuing Bank in the L/C

17 / 27

checks the documents for discrepancies with the L/C and presents them to the Advising Bank. ⑧ The Advising Bank bears the documents against terms and conditions of the L/C and forwards them to the Confirming Bank. ⑨ The Confirming Bank checks if the documents comply with the L/C and makes payment immediately (if the L/C is available by sight) or on a certain date (if L/C is available by deferred payment). ⑩ The Issuing Bank reimburses the funds to the Confirming Bank immediately after the payment.

There is another advantage in using confirmed L/C. Assume that after long negotiations your potential buyer is ready to strike a deal, which is very profitable for you. The only condition you are not comfortable with is the deferred payment of 90 days after the shipping date. You feel that you may have some problems with cash flow, because you have to pay for the freight, packaging and so on. However, with the confirmed L/C, you won't.

A confirmed L/C may be used not only for securing the payment under the L/C but also as a security to obtain additional funds from the Advising Bank. Generally, the Advising Bank can discount the L/C in your favour as soon as the documents stipulated in the L/C are presented to the bank and checked. The funds will be considered as a loan, which will be automatically reimbursed by the Confirming Bank on the maturity date indicated in the L/C.

(vi) Information that an L/C Must Have

Although the buyer applies for L/C, it is essential for you to be absolutely sure that the L/C was prepared correctly and there is no legitimate ground for refusal of payment under the L/C.

L/C must enclose:

 Full Applicant's name and address;  Full Beneficiary's name and address;  Issuing Bank details;  Advising Bank details;  Form and type of credit (e.g. irrevocable, transferable;  Issue date;  Expiry date;  The latest date of shipment (usually "no later than");  Expiry date for presentation of documents;  Amount payable under L/C;

18 / 27

 Currency of payment;  Port of loading;  Port of discharge;  Terms of delivery;  Indication of the payment of the freight (Freight Prepaid/Freight Collect);  Allowances for partial shipment or transhipment if needed;  Type of payment availability (e.g. at sight, on the maturity date);  Description of goods (must correspond with the description given in the invoice);  List of documents required for the payment;  Accountability for bank charges.

(vii) Documents Required under an L/C

You should negotiate which documents are to be included in the L/C before the L/C is issued. Always try to keep this list as short as possible. Never agree to include a document that must be signed or authorised by the buyer's representative or a document that may never be produced (say, a certificate, which should be issued by a foreign agency).

It is important to note that there is a difference between the documents you have to present under the L/C and the documents you have to supply according to the contract. It is not necessary to mention all documents required by the contract in the L/C.

Most likely, you will be required to present a commercial invoice, a transport document and an insurance policy (or certificate). The list of additional documents depends on the agreement made between you and the buyer. Usually the buyer will include documents needed for the customs clearance. The list may include:

 Certificate of origin;  Certificate of quality;  Weight certificate;  Pre-shipment inspection certificate;  Packing declaration;  Packing list, and so on.

19 / 27

Key Expressions & Technical Terms

Accepting Bank/Paying Bank/Negotiating Bank 인수은행/지급은행/매입은행 Actual total loss/Constructive total loss 현실전손/추정전손 advice of L/C 신용장 통지 Advising Bank 통지은행 All Risks 전위험담보/포괄담보 applicant 발행의뢰인 area/capacity/volume 면적/용량/용적(체적) Banker’s Drafts 은행 환어음 bare boat charter / demise charter 나용선계약 bearer/holder 소지인 be entitled to VERB ~할 권한이 있다/~할 수권을 부여받다 be susceptible to ~에 민감하다/취약하다 beneficiary 수익자 Bills of Exchange (Drafts) 환어음 Bill of Lading (B/L) 선하증권 Cash in Advance/Cash before Delivery 선지급/선적적현금불 Certificate of Conformity (CoC) 준수인증서 Certificate of Origin 원산지증명서 chartered carrier 전세기항공사/부정기항공사 chartered ships 용선(傭船) clean draft 무화환어음 collection letter/collection notice (채권)추심서/수금(청산)통지서 Commercial Drafts 상업어음 comply with/conform to ~에 일치하다/순응하다 conditional/theoretical weight 조건/이론중량 Conference Shipping 해운동맹선(사) Confirmed L/C 확인신용장 Confirming Bank 확인은행 consignment 위탁매매/적하품/탁송 consolidated consignments (consolidator) 항공화물주선업 Customs Invoice/Consular Invoice 세관송장/영사송장 D/A(Documents against Acceptance) 어음인수서류인도조건

20 / 27

D/D (Demand Draft) 요구불어음 date draft 일자후(확정)일출급어음 deferred payment 연지급 D/P (Documents against Payment) 어음지급서류인도조건 description of goods 물품의 명세 document of title 권리증권 documentary draft 화환어음 Documentary Letter of Credit 화환신용장 Documentary Collection(Bill of Exchange)/Draft (화환)추심어음 drawee/drawer 어음지급인/어음발행인 drawings 인출금 due attention 신중한 주의 elastic clause 단서조항/신축[탄력]조항 Export License/Import License 수출허가서/수입허가서 extraneous risks/special risks 부가위험/특수위험 Fair Average Quality (F.A.Q) 평균(중등)품질조건 financial documents 금융서류 Freight Prepaid/Freight Collect 운임선지급/운임후지급 Fresh Water Rain Damage 담수우손(淡水雨損)담보 FPA (Free from Particular Average) 단독해손부담보/분손부담보 General Average/Particular Average 공동해손/단독해손

General Conference on Weights and Measures (GCWM) 국제도량형총회

Good Merchantable Quality (G.M.Q) 판매적격품질조건 gross/net weight 총/순중량 GSP (Generalised System of Preference) 일반특혜관세제도 indicative/warning marks 참조/경고 화인 inland waterway transport 내수로운송 inner/outer packing 내장/외장 Inspection Certificate 검사증명서 insurance coverage 보험부보(담보)범위 insurance policy/certificate 보험증권/보험증명서 insurer(assurer)/insured(assured) 보험업자/피보험자(보험계약자) insured amount(value)/premium 보험금액(가액)/보험료

21 / 27

International Air Transport Association (IATA) 국제항공운송협회 International Maritime Organisation (IMO) 국제해사기구 International System of Units (SI) 국제단위계 irrevocable/revocable L/C 취소불능/취소가능 신용장 ISO (International Organization for Standardisation) 국제표준화기구 issue an L/C 신용장을 발행하다 Issuing Bank 발행은행 L/C Amendment 신용장 조건변경 leakage/ spillage 누수/(기름 등의) 유출 Lighter Aboard Ship (LASH) LASH선(컨테이너선박의 한 종류) limitation clause 제한조항 liner/tramp(er) 정기선/부정기선 loading/unloading 선적 또는 적재/양하(揚荷) lodge a claim (for compensation) (보상)청구를 제출하다 Mate’s Receipt (M/R) 본선화물수령증 more or less clause (M/L clause) 과부족용인(허용)조항 M/T (Mail Transfer) 우편송금환 multimodal transport documents 복합운송서류 Nominated Bank 지정은행 Non-conference Line 비동맹선(사) Notifying Bank 통지은행 OBO (Oil/Bulk/Ore) carrier OBO선(광석/산적/원유겸용) open account 청산계정/청산결제방식 Open Policy 예정(포괄)보험증권 Packing List 포장명세서 parcel post insurance 소포우편보험 payment settlement 대금결제 perils of the sea 해상고유의 위험 period of presentation 제시기간 pilferage 발하(拔荷), 부분분실 또는 좀도둑질 pinching effect 핀칭효과 또는 적심(摘心)효과 port(s) of call 기항지 Presenting Bank 제시은행 primary product/raw materials 1차산품(생산물)/원료(원자재)

22 / 27 produce 생산물(품)/(특히) 농산물 pro forma invoice/commercial invoice 견적송장/상업송장 promissory note 약속어음 pursuant to ~에 의하여/~를 준용하여 quality/weight certificate 품질증명서/중량증명서 quality standards 품질표준 Rail Consignment Note 철도화물수탁증 Reimbursement Bank 상환은행 Remitting Bank/Collecting Bank 추심의뢰은행/추심은행 remunerative contract 유상계약 resale value 전매가치(액) Road Consignment Note 도로화물수탁증 Roll-on-Roll (Ro-Ro) vessel 로로선 sales by sample/grade or specification 견본매매/규격매매 sales by brand or trademark/illustration 상표매매/삽화(도해)매매 Salvage Charges (해난)구조비 scheduled airlines 정기항공사 Sea Waybill (SWB)/Air Waybill (AWB) 해상화물운송장/항공화물운송장 shipping marks 화인 shipping advice 선적통지 sight draft/time draft 일람출급환어음/기한부환어음 stipulate 규정하다/명기하다 stowage 적하(積荷) 또는 적부(積付) Sue and Labour Expenses 손해방지비용

SWIFT (Society for Worldwide Interbank Financial Telecommunication) 세계은행간 금융데이터 통신협회 tariff/(customs) duty 관세 Terms of Commodity 상품(교역)조건 time charter 기간용선계약 TPND (Theft, Pilferage and Non-delivery) TPND(도난, 발하, 불착손 위험 담보) tolerance 용인, 관용/허용오차 transhipment/partial shipment 환적/분할선적 T/T (Telegraphic Transfer) 전신송금환

23 / 27 total loss/partial loss 전손(全損)/분손(分損) Tramp Shipping 부정기선(사) Transferrable L/C 양도가능 신용장 undertaking 확약 underwriter 보험업자 voyage charter (trip charter) 항해용선계약 wire transfer 전신송금 WPA/WA (With Particular Average/With Average) 단독해손담보/분손담보

24 / 27

Check-up Questions 06

Q1. Translate the paragraph below into Korean.

In the Implementation Phase, the exchange of products itself and the according payment, logistics, insurance and customs services take place by delivering goods, providing required documents and paying for the goods as per the performance of contract and the termination of contract.



Q2. Which one of the following is NOT a basic obligation for the seller as required by the contract during the Implementation Phase?

① Delivering the goods ② Handing over any documents relating to delivering and transferring the goods ③ Arranging financial documents or instruments for the payment ④ Handing over any documents relating to transferring the property in the goods

Q3. After receiving the Letter of Credit (L/C), the exporter must examine the L/C against the sales contract. Which one is NOT concerned while checking the L/C?

① The political background and financial standing of the issuing bank ② The nature of the credit and the liabilities of the negotiating bank ③ The quality, the quantity, packing clauses ④ The date of shipment, the date and place of validity

Q4. Translate the paragraph below into Korean.

In the global business transaction and contract negotiation, both the buyer and seller must make sure of the commodity intended for the transaction and describe the goods in the sales contract exactly. As far as commodity in trade is concerned, it comprises name of commodity, quality of commodity, quantity of commodity, packing of commodity, making of commodity and commodity inspection.



25 / 27

Q5. Write the following sentence in English.

귀사가 요구한 대로, 당사는 7월 말까지 건설용 중장비 CHE-4003의 선적을 CKD상태 로 준비하고 있습니다. 8월 말까지 유효한 취소불능 신용장을 당사를 수익자로 하여 발행하여 줄 것을 요청드립니다.

[Useful expressions] As requested - 요구한 대로 Heavy Construction Equipment - 건설용 중장비 in our favour - 당사를 수익자로 하여 to issue - 발행하다



Q6. Write the following sentence in English.

강관 SP-5051에 대한 주문을 1회에 전부 선적할 수 없다는 귀사의 통지를 막 받았습 니다. 당사는 거래은행에 분할선적을 허용하도록 신용장 조건의 수정을 지시했습니다.

[Useful expressions] Steel Pipe product SP-5051 - 강관 SP-5051 to ship at one time - 1회에 전부 선적하다 partial shipment - 분할선적 to allow (permit) - 허락하다 the terms of L/C - 신용장의 조건 to amend (adjust) - 수정하다



26 / 27

Q7. Which one is NOT considered a basic document required as per Transport Documents?

① Bill of Lading (B/L) ② Commercial Invoice ③ Packing List ④ Customs Invoice

Q8. Write the following sentence in English.

TK-1199A형의 각종 주방기구 1,200대의 선적준비가 거의 다 되었습니다. 이에 선적지 시를 이메일로 보내주시길 바랍니다. 귀사께서 즉시 통지해 주시면 선적일자를 3주간 단축할 수가 있습니다.

[Useful expressions] a full range of kitchenware - 각종 주방기구 be nearly ready for - 거의 다 되었다 if you inform us at once - 즉시 통지해 주시면 the shipping date - 선적일자 advance (shorten) - 단축할 수 있다



Q9. Write the following sentence in English.

4월 6일자 귀사의 전자우편을 받았으며, 불가항력의 사유로 인해 선적일자 3월 30일 을 지킬 수 없게 되었음을 대단히 죄송하게 생각합니다. 이런 상황하에서, 유감스럽지 만 귀사의 주문 취소를 수락할 수 밖에 없으나, 이 지연은 결코 당사의 잘못으로 야기 된 것이 아님을 양해하여 주시기 바랍니다.



27 / 27