International Business

Operations
Lecture 6/13
24.10.2019
Ing. Eva Křenková, Ph.D.
Office hours: every Monday 11:00 –
12:00 NB213
E-mail: eva.krenkova@vse.cz
FROM NEXT WEEK:
Dr. Vít HINČICA
ROOM RB211

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Terms of payment

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 The topic of today´s lecture
Drafts
• What is a draft and promissory note
• operations with drafts
- endorsement
- protesting a bill
- Bill of exchange discounting
• Drafts in documentary payments

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 Documentary payments
• Documentary payments are a way to ensure that
the exporter, through documents, retains
control of the goods until they are paid for.
• This is de facto payment against the goods,
usually against the documents of title that
represent the goods, or against the release of
the goods to the importer.
• Documentary payments minimise the
commercial risk and, as high quality payment
instruments, provide the opportunity to obtain
more favourable pricing conditions

Source: ČEB 5
From last lecture ….

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 Documentary credit – L/C
• „The importer provides the exporter with an
advance guarantee of payment that is conditional
upon the exporter presenting a set of documents
proving that exporter has shipped conforming
goods.“
• With a documentary credit, unlike with a
documentary collection, the buyer´s bank is
under obligation.
• With a confirmed documentary credit, both the
buyer´s and also the seller´s bank are under
obligation Source: ICC : ICC Guide to Export/Import, Jimenez, G.C.,
ČEB 7
 Documentary collection
• „The exporter ships the goods to the
importer´s country, but the shipping
documents tranfering control over the goods
are not released to the importer until the
importer pays or accepts to pay.“
• A documentary collection is always a
payment obligation for the importer, not for
the bank.

Source: ICC : ICC Guide to Export/Import, Jimenez, G.C..,

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ČEB 8
 Documents required for trade payments
the bill of exchange (draft)
the bill of lading
the commercial invoice
insurance documents
official certificates and licences
(certificate of origine, inspection certificates and
other)

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Bill of Exchange / draft
Promissory note

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• Used alone or in combination with other
documets
• The Czech law is based on the Geneva
Convention Providing a Uniform Law For Bills
of Exchange and Promissory Notes
• 1930
• Adoption:

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 Bill of exchange

= unconditional payment order of a drawer to a

drawee to pay a certain financial sum to a payee
(beneficiary)

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 Promisory note

= a promise of a drawer (maker) to pay a payee

(creditor) a certain sum of money
- the drawer is the direct debtor obliged by his
signature to pay at the maturity
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 Endorsement
• Drafts are negotiable instruments
• It´s an instrument made „to order“
• endorsement
= the transfer of rights that a person has by
possessing a draft to a new beneficiary
= a signature placed on the back of a bill of
exchange or a slip affixed thereto

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• An endorser endorses the rights arising from
the bill of exchange to the endorsee

• Pay to the order of

• Endorsee
• Signature of endorser

• Endorser is an indirect debtor and gaurantees

the payment of the bill together with the
direct debtor
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• Two types of endorsement:
– The name of a new beneficiary (endorsee) is
indicated
– Endorsement „in full“

– Pay to the order of/After me to order

– Information about endorsee
– The signature of endorser

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• Two types of endorsement
– Blank endorsement – the bill is payable only to
the bearer: leagaly talking an order instrument
was transfered into a bearer instrument

– After me to order
– Signature of the endorser

– Or

– Signature of endorser

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• Endorsement can be excluded adding the
words „not to order“ in the text of the bill
• In such a case the drawer prohibits the use of
endorsement and the instrumentcan only be
transferred with the effect of an ordinary
assignment

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 A statement of time of payment

A bill of exchange may be drawn payable:

• At sight;
• At a fixed period after sight;
• At a fixed period after the date of drawing;
• On a fixed date.

• Bills of exchange at other maturities or payable

by instalments are null and void.
• Not specifying the maturity date – considered
payable at sight
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• A bill of exchange at sight is payable on
presentment. It must be presented for
payment within a year of its date. The drawer
may abridge or extend this period. These
periods may be abridged by the endorsers.

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 Acceptance
• An acceptance is written on the bill of
exchange. It is expressed by the word
„accepted“‚ or any other equivalent term. It is
signed by the drawee. The simple signature of
the drawee on the face of the bill constitutes
an acceptance.

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 A Statement of AVAL
• Bill of exchange backed by buyer´s bank (aval)
• Aval – to hedge against the risk of non-payment
the exporter can ask for a „bill of exchange
guarantee clause“ to be inserted in the sales
contract
• Then the bank which has added signature on the
bill of exchange jointly and severally guarantees
the payment of the bill of exchange on the due
date
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 Termination
• The relationship from a bill of exchange is
terminated by proper payment for the bill by it´s
drowee or in case of a promissory note by it´s
maker (drawer).
• In case of non payment the possessor may excise
the rights of recourse against all bill debtors or
against each of them.
• The necessary step is protesting the bill.
• Default of acceptance or on payment must be
evidenced by an authentic act (protest for non-
acceptance or non-payment)
• A protest is a statement of dishonor – by a notary
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 Discounting a bill of exchange
• short-term loan aimed at financing trade
receivables to maturity
• Receive liquid financial funds and benefit
from a loan with low interest rate for a
relatively long period of time.

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• Recommended
readings:
• ICC Global Survey on
Trade Finance

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 Documentary credits and bills of
exchange
• Letter of credit is a written undertaking of the
bank, issued at the request of the applicant, to
pay a certain amount in the agreed currency
to the beneficiary, provided that the
beneficiary presents all requested documents
exactly as stipulated in the L/C and meets all
other terms and conditions set out in L/C
• Payable at sight
• L/C with deferred payment terms
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• Instead of paying the exporter right away, the
drawee´s bank accepts a draft, which is a
promise to pay the exporter on the stated
maturity date.
• The draft becomes a negotiable instrument
and can be discounted

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 Letter of credit terms:

41D Available with ANY BANK IN CZECH REPUBLIC BY

NEGOTIATION
42C Drafts at SIGHT
42 A Drawee ISSUING BANK
78 Instructions to the paying/accepting/negotiating bank:
WE HEREBY ANGAGE WITH DRAWERS AND BONA FIDE
HOLDERS THAT DRAFTS DRAWN AND NEGOTIATED IN
CONFORMITY WITH THE TERMS OF THIS CREDIT WILL BE
DULY HONOURED ON PRESENTATION

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 Documentary collection and a Bill of
exchange
• Documentary collection = The importer makes
payment against remittance of the
documents, which provide him with a proof
that the goods have actually been dispatched
to his address or have been placed aboard a
ship
• D/P – documents against payment
• D/A – documents against acceptance

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 Documentary collection payable
against acceptance
• The exporter will grant a deffered payment, but
he will only remit the documents giving right to
delivery of the goods against acceptance of a bill
of exchange by the buyer
• Through the channel of banks, the documents are
presented against acceptance.
• The documents are remitted to the drawee (the
importer)against acceptance of the bill of
exchange enclosed, with a due date which can be
– To ___ days after sight
– On a given due date
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 The accepted bill of exchange
• Can be returned to the exporter who will, where
appropriate have it discounted in his country (on
the due date the bill of exchange will be again
retourned in order to be presented to the drawee
for payment)
• Can be kept until the due date at the presenting
bank, which will notify the remitting bank that
the bill of exchange has been accepted and will
keep it in order to present it for payment on the
due date (without commitment)
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 AVAL
• With D/A the importer has the advantage of
receiving the goods, which have not yet been
paid for.
• Aval – to hedge against the risk of non-pyment
the exporter can ask for a „bill of exchange
guarantee clause“ to be inserted in the sales
contract
• Then the bank which has added signature on the
bill of exchange jointly and severally guarantees
the payment of the bill of exchange on the due
date
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