Export Bills of Exchange

Export Bills of Exchange are the drafts or bills of exchange, drawn by the shipper of goods or the provider of services in one country, on people in another country who are buying the goods or using the services, that constitute the chief supply of international currency.

A draft or a bill of exchange performs two or three functions. A draft payable at first sight is a demand for payment due and a receipt for payment made. A draft payable at some future period after sight becomes a demand for payment by the seller, a promise of payment by the buyer on the agreed date, and a receipt for payment after such payment has been made.

The person who makes out the draft (i.e., the person who receives the money) is said to draw the draft and is called the drawer. The person to whom the draft is addressed and from whom payment is demanded is called the drawee. When the drawer expects the drawee to make payment immediately, the draft is presented to him and this draft is called a “sight draft” which is said to be “drawn at first sight” or “on demand” or on presentation.” In its strict technical meaning, a sight draft should be retired or honored (meaning thereby the payment demanded should be made) by the drawee immediately when it is presented to him; but in export trade, most drawees wait until the vessel carrying the goods arrives at the port of destination before doing so.

The bank in the buyer’s country normally receives a sight draft and the shipping documents which accompany it sometimes before the goods arrive, as these documents are sent by air mail; but whilst the bank will notify the buyer that the documents have been received and are due for payment, it will not take any further action to obtain payment until it knows that the vessel has arrived. This notification to the buyer that the draft is with the bank awaiting payment is called presentation; and when the buyer pays the draft, the bank will hand over the shipping documents (i.e., the bill of lading, invoices, insurance certificates, etc.) to him. The buyer is then said to have taken up the documents.

Unless and until the sight draft has been returned, the bank will not hand over the shipping documents and the buyer cannot, therefore, obtain the goods which can only be released by the shipping company in exchange for one of the copies of the bill of lading. If the exporter has been paid through a letter of credit, the bank making the payment will own the goods if the drawee does not pay. If the exporter has agreed to send the goods abroad on D/P terms (documents against payment terms) without asking for credit to be opened, the goods will remain the exporter’s property until the drawee has paid.

When the draft is drawn for payment at any date later than the presentation, it is called a usance draft or a usance bill. When the exporter has agreed to give credit to the foreign buyer for a certain number of days or weeks, the exporter will draw such a usance draft on the buyer. Similarly, the buyer may be able to arrange with his bank to advance the money for the goods and to pay the bank back, sometimes after he has received the goods. In this case, the bank will open a letter of credit and arrange to pay the seller, but will require the seller to submit drafts at 30 days’ sight or 60 days’ sight or after the number of days they have arranged to allow credit to the buyer. The period which is allowed between presentation and payment is referred to as tenor of the draft. When a draft is drawn at 30 days’ sight, it means that the drawee has to retire it thirty days after it has first been presented to him. What in fact happens is that, as soon as the draft is received by the bank abroad, it will be handed over to the drawee, who will then write upon the word draft accepted with the date and his signature. The actual wording will, in all likelihood, be: “Accepted payable at and in the blank space will be inserted the name of the drawee’s own bank, thereby converting the draft into a post-dated cheque.

As soon as the bank abroad receives the accepted draft from the drawee, it will hand over the shipping documents to him and this is the explanation of the term, “D/A or documents against acceptance”. When the exporter has already been paid under letter of credit, the bank abroad will recover the payment after 30 days, or whether other tenor is allowed, have elapsed from the date on which the drawee signed this acceptance.

If there is no letter of credit, the bank aboard will notify the exporter that his draft has been accepted and give the date of acceptance, unless instructions have been given to the contrary that the bank should hold the accepted draft as agent for the exporter and recover payment from the drawee after the appropriate number of days has expired. The bank will then remit the money to the exporter after deducting its own charges.

While it is usual for usance drafts to be presented and accepted immediately they arrive abroad, there are some cases where buyers will not sign their acceptance until the vessel carrying the goods has arrived at their port. As the documents are sent by airmail and reach the foreign bank within three or four days, the goods many take four or five weeks to reach the foreign port. The acceptance of a draft only on the arrival of the vessel will, therefore, give the buyer credit for another four to five weeks.

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