Module-Customer Clearing & Freight Forwarding

An exporter may find that an order backed by an

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An exporter may find that an order backed by an irrevocable L/C will facilitate obtaining pre- export financing in the home country. If the exporter’s reputation for delivery is good, a local bank may lend funds to process and prepare the merchandise for shipment. Once the merchandise is shipped in compliance with the terms and conditions of the credit, payment for the business transaction is made and funds will be generated to repay the pre-export loan. EXHIBIT 1.3 Essence of a Letter of Credit (L/C) The major advantage of an L/C to the importer is that the importer need not pay out funds until the documents have arrived at a local port or airfield and unless all conditions stated in the credit have been fulfilled. The main disadvantages are the fee charged by the importer’s bank for issuing its L/C, and the possibility that the L/C reduces the importer’s borrowing line of credit
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18 with its bank. It may, in fact, be a competitive disadvantage for the exporter to demand automatically an L/C from an importer, especially if the importer has a good credit record and there is no concern regarding the economic or political conditions of the importer’s country. A. Draft A draft , sometimes called a bill of exchange (B/E), is the instrument normally used in international commerce to effect payment. A draft is simply an order written by an exporter (seller) instructing an importer (buyer) or its agent to pay a specified amount of money at a specified time. Thus, it is the exporter’s formal demand for payment from the importer. The person or business initiating the draft is known as the maker , drawer , or originator . Normally, this is the exporter who sells and ships the merchandise. The party to whom the draft is addressed is the drawee . The drawee is asked to honor the draft, that is, to pay the amount requested according to the stated terms. In commercial transactions, the drawee is either the buyer, in which case the draft is called a trade draft , or the buyer’s bank, in which case the draft is called a bank draft . Bank drafts are usually drawn according to the terms of an L/C. A draft may be drawn as a bearer instrument, or it may designate a person to whom payment is to be made. This person, known as the payee, may be the drawer itself or it may be some other party such as the drawer’s bank. Negotiable Instruments If properly drawn, drafts can become negotiable instruments . As such, they provide a convenient instrument for financing the international movement of the merchandise. To become a negotiable instrument, a draft must conform to the following requirements: It must be in writing and signed by the maker or drawer. It must contain an unconditional promise or order to pay a definite sum of money.
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