TELEGRAPHIC TRANSFER (TT) DEFINITION

The most common payment terms for contracts are “open account” (the seller delivers without any guarantee, and expects the payment at a later stage), “documentary collections” (the exchange of the documents representative of the goods và the payment are managed via banks), “letters of credit”, “cash in advance”. 

CASH IN ADVANCE (CA)

Cash in advance is one of the most secure payment terms for sellers, & the least secure for buyers. Indeed, Seller ships the goods to the buyer only after receiving the full (or partial) payment for the goods (upfront payment).

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Payments are made by wire transfer or by company checks (in the US). In the project materials industry, cash in advance payment terms are rather rare và may occur for stock and fast-traông xã deliveries only.

What is “TT Payment”?

A ngân hàng transfer, otherwise called telegraphic transfer or telex transfer (“T/T”) is the electronic transfer of funds from a buyer/importer to lớn a seller/exporter, via a bank or a similar institution.

For most countries and banks, as a buyer confirms a wire transfer, the funds cannot be recovered from the beneficiary (such payments are irrevocable). ACH payments may be an exception, i.e. they can be revoked. T/T payments expose the buyer khổng lồ high risks.

Alternative payment risks, described below, have been introduced to lớn minimize the payment risks for buyers (& suppliers) in international trading operations.

OPEN ACCOUNT

Under open tài khoản payment terms, the supplier ships the goods lớn the buyer without receiving upfront payments and collects the due amounts at a later date (15, 30, 60, 90 days or more).

Discounts on the invoice face value may be granted, on the sale invoice, for anticipated payments.

This type of payment, which is quite comtháng, has an opposite nature lớn “cash in advance”, as it is very favorable for the buyer & unfavorable for the seller (who bears the full payment risks).

Payments in open trương mục are generally accepted by suppliers with low negotiation power or by suppliers that have sầu long-lasting relationships with the buyer.

Credit Insurance

Some sellers subscribe credit insurance contracts believing that they will protect their “open account” sales.

A comtháng trait of these types of contracts, which are generally expensive sầu, is that they actually cover the creditor in case of bankruptcy of the debtor but they vì chưng not cover the seller when the buyer rejects payment for any due or undue cause.

When a buyer disputes a delivery, the insured seller has to turn lớn the Law, and not lớn the credit insurance company, to lớn get the payment.

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BANK’S DOCUMENTARY COLLECTION

Under this payment terms, the seller gets paid và the buyer và the seller exchange the documents representative sầu of the goods and the payment via the intermediation of a remitting and a collecting bank).

This type of payment works in this way:

The seller ships the goods to the buyerThe submits the shipping documents and a “collection order” lớn its bank (“Remitting bank”) at the time of shipping. The draft includes instructions khổng lồ release the documents lớn the buyer upon receipt of a buyer’s payment or buyer’s acceptance of the draft (which can be at sight, demanding payment on presentation, or deferred at a future date)The Remitting bank sends the documents, the draft, and the collection instructions to lớn the “Collecting or presenting bank” (the ngân hàng of the importer)The collecting bank carries out the seller’s collection order &, upon receipt of payment from the buyer, remits payment to the seller’s bank and to lớn the seller, ultimately

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CASH AGAINST DOCUMENTS (“CAD” or “DP”)

Cash Against Documents (“CAD” or “D/P”) are widely used payment terms in international trading operations.

CAD is a payment term in which an exporter instructs his bank khổng lồ hand over the shipping documents lớn the importer when the importer fully pays the accompanying bill of exchange or draft.

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Under a CAD agreement, the seller receives the payment of the goods if the buyer pays the due amount và withdraws the pre-agreed documents (generally through its own bank).

The shipping document set includes, generally, the commercial invoice, packing menu, demo certificates, inspection documents, bill of lading, insurance certificate, mill demo reports, and allows the importer to take possession of the goods.

The advantages of CAD are:

Lower complexity & cost than a letter of credit (easier both for seller & buyer)Buyer’s credit lines are not impactedFaster process for buyer và seller, as ngân hàng intervention is minimal

This payment term is represented in the illustration below:

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Risks of Cash Against Document Payment:

The main risk of CAD payment term is that buyers may not collect the goods & the shipping documents after the shipment has taken place.

Hence, DAP.. is a very different arrangement than the payment by letter of credit, where the seller basically no payment risk in case compliant documents are sent to the issuing ngân hàng within the validity of the credit.

Due to lớn this fact, sellers shall be very careful with DAPhường payment terms as they generate unpaid invoices & excess stochồng.

LETTER OF CREDIT

A Letter of Credit, simply defined, is a written instrument issued by a bank at the request of its customer, the Importer (Buyer), whereby the ngân hàng promises lớn pay the Exporter (Beneficiary) for goods or services, provided that the Exporter presents all documents called for, exactly as stipulated in the Letter of Credit, and meet all other terms và conditions mix out in the letter of Credit.

A Letter of Credit is also commonly referred khổng lồ as a Documentary Credit.

Letters of credit are used between trade partners that vị not know themselves well, are located in remote locations and bởi vì not accept the payment risks of other payment terms as open trương mục, ngân hàng transfer, and, cash against documents.

The terms “Letters of Credit” /or L/C) và “Documentary Credit” (D/C) have sầu the same exact meaning. The first is more common in USA và Asia, whereas the latter is comtháng terminology in Europe.

HOW TO ISSUE AN LC

Before issuing an LC, the importer shall have approved credit limits sanctioned by the issuing ngân hàng.

Moreover, imports và exports transactions that involve sầu foreign currencies are subject lớn foreign exchange regulations and other International rules lượt thích UCPDC 600, URR etc.

Generally, the issuing bank requires the importer khổng lồ submit an LC Application khung to issue a Letter of Credit.

After receiving the application, the bank issues a draft LC that the importer and exporter can Đánh Giá &, in case, amkết thúc. As the LC is agreed between the parties, the issuing ngân hàng submits the LC to the exporter advising bank, who in turn informs the seller. As an LC is received, the seller can start the manufacturing or delivery operations with strong payment security.

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TYPES OF LETTERS OF CREDIT

There are a few types of letter of credit, the most common are:

At Sight LCTime/Usance LCDiffered/Mixed Payment LCRevolving LCConfirmed LCTransferable LCBaông xã to Baông chồng LCAdvance Payment LCDiscounting LCStandby LCSTANDBY LETTER OF CREDIT

A standby letter of credit is a guarantee of payment by a ngân hàng on behalf of a client. It is a loan of last resort in which the bank fulfills payment obligations at the kết thúc of a contract in case of failed payment by the bank’s client. Standby letters of credit are issued not khổng lồ be used, normally. Standby letters of credit help prove sầu a business’ creditworthiness và pay bachồng ability. Types of Standby Letters of Credit

Performance Standby letter of creditPerformance standby letters of credit ensure the nonfinancial contractual obligations (quality of work, amount of work, time, cost, etc.) are performed in a timely and satisfactory manner. If these obligations are not met, the bank will pay the third party in full.The financial Standby letter of creditFinancial standby letters of credit ensure financial contractual obligations are fulfilled. Most SLOCs are financial.Financial SLOCs are often required when performing an international trade or other large purchase contracts under which other forms of payment protections (such as litigation in the sự kiện of non-payment) can be difficult khổng lồ obtain.TRANSFERABLE LETTER OF CREDIT

A transferable letter of credit is a special transferable khung of a documentary letter of credit opened for the benefit of the intermediate seller (the first beneficiary).

The transferable form allows the intermediate seller khổng lồ apply khổng lồ the nominated ngân hàng with a request of transferring the letter of credit in whole or in part to the supplier (the second beneficiary).

In case the intermediate seller purchases products from multiple suppliers, it has the right khổng lồ instruct the nominated bank khổng lồ transfer the letter of credit by parts to lớn each of the suppliers.