Some small imports are paid for by money orders, and when importers pay for goods in advance they usually use the bank draft or cable or mail transfer just described. The draft, cable transfer, and mail transfer are, furthermore, the principal forms of remittance by which an importer will cover a maturing obligation incurred a month or so earlier when he bought goods on an open account or consignment basis. But traditionally and generally the dominant type of exchange instrument in the commodity trade between nations is the draft drawn by the exporter either in United States dollars or in foreign currency. If the exporter is satisfied with the credit rating of the importer and the exchange risk, he may draw an ordinary draft on the importer. If the credit rating of the buyer is not acceptable to the seller, or if custom requires, he may draw on a bank under a commercial letter of credit, assuming that a letter of credit is opened by the buyer through his bank. In either case the drafts may be in the exporter's currency or in the importer's currency.
Let us suppose that for one reason or another an American exporter decides to sell goods to an English importer on a sterling draft basis. He will prepare the goods for shipment, make up a commercial invoice, obtain an insurance certificate or policy, and deliver the goods to a carrier to obtain a bill of lading. He will also obtain whatever authorization is required by the British Consul. These papers--the commercial invoice, consular invoice, insurance certificate or policy, and bill of lading-are the principal "documents" used in export-import trade.
The exporter will then draw a draft on the importer either to his own order or, to the order of a bank. The terms of the sale will have been agreed upon in advance. If the Englishman is to pay on sight or on arrival of the goods, the draft will be drawn payable "at sight" or "on arrival"; otherwise it will be payable a specified number of days "after sight" or "after date" as the case may be. The importer will not be able to obtain the goods until he has paid the sight or arrival draft and obtains the shipping documents. In general postponing the details-the documents on a time draft will be turned over to him either on payment (i.e., "documents on payment" or D/P) or on acceptance of the draft (i.e., "documents on acceptance" or D/A). In this case say the agreed terms are: a sterling draft 60 days date, documents on acceptance, goods invoiced, and draft drawn for £3,000. If, as is probable, the exporter is charging the importer interest for the 60 days' credit, we may assume it is included in the cost of the merchandise, since interest on drafts is customarily implicit rather than explicit.
The exporter attaches to the draft the documents previously mentioned and if the credit standing of the importer warrants he may send the documents direct to the importer. More probably, however, he will employ an intermediary as collecting agent--a bank, for example. The bank will forward the draft and documents to its correspondent nearest the English importer. The importer will inspect the documents and if he finds everything in order he will write his "acceptance" across the face of the bill, hand it back to the correspondent, and retain the documents. Following instructions, the correspondent will now hold the acceptance till maturity, when it will be presented to the acceptor for payment.
Ultimate payment will be in pounds sterling, and if the exporter, who is in this case carrying the draft till. maturity, fears that sterling may decline during the 60 days the acceptance is outstanding, he may enter a contract with his bank to sell £3,000 for future delivery at an agreed rate. He might, however, have sold the draft to his bank, avoiding the exchange risk and obtaining the dollar equivalent of £3,000 at the current rate on 60-day sterling bills. If, by chance, acceptance should be refused by the importer-drawee in England, the loss will rest on the exporter-drawer in the United States and not on his bank which bought the draft in good faith. Whether the bank will have its correspondent in England hold the acceptance until maturity or discount it in the London market depends on whether it wants to add to its sterling deposits at once or prefers to earn the interest on the bill.
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