When an American exporter of manufactured goods sells to good risks in markets free of exchange restrictions he generally draws a dollar time draft on the foreign customer, shipping documents to be handed over to drawee on his acceptance of the draft. These drafts are payable a specified number of days after sight somewhat more often than after date, although the exporter normally prefers a date draft, because he can then determine the maturity date in advance. If the time draft is payable, say, 30 days after sight, any delay--intentional or unavoidable--in the sighting of the draft by the importer postpones the maturity date. This explains why exporters who may be willing to sell to a certain customer on a 60 days date basis may restrict the terms to 30 days on a sight basis.
To the foreign customer, these terms of dollar time drafts, documents on acceptance, are very satisfactory. To be sure they force him to face the risk of exchange, but they place the burden of the financing on the seller. Usually the American exporter will depend on his bank for the collection and possibly the discount of the drafts.
Draft Basis, Documents on Payment
Under these terms, the exporter draws a draft on the importer, attaches the customary shipping documents to it, and forwards it, usually through banking channels, to the vicinity of the importer. Thus far everything is identical to the time draft, D/A, arrangement described in the preceding section, but the importer can here get possession of the bill of lading--and the goods--only by paying the draft. Of course, he may obtain the money for this purpose through one of the credit arrangements which will be discussed later. 1 As to that, the exporter is indifferent. What he is demanding is that he, through the collecting bank, be paid (in the currency of the draft) before the goods are released to the importer.
These are harsh terms. They throw onto the importer the whole burden either of bearing the credit load or of finding someone else to take it on. Yet among American manufacturers, at least, they are frequently used. About a third of the exporters questioned were drawing sight drafts, payable on demand, on at least some good risks, even in free exchange markets, and hence were requiring that payment be made before the release of documents to the importer. Furthermore, when exchange restrictions are present or when credit risks are doubtful, sight draft, D/P, becomes the preferred, though by no means the only, export arrangement. Of course, some groups of exporters use these terms less extensively than do others.The foregoing refers only to sight drafts, which are the common medium by which documents on payment terms are exacted from the importer. Time drafts also may be coupled with D/P terms. In fact, a number of exporters queried were drawing time drafts, documents on payment, even on some good risks where exchange restrictions were unimportant.We have said that documents on payment terms are harsh. What circumstances, then, may cause exporters to use them?If credit risks are good, exporters will normally require payment before release of documents only if:
1. The goods are perishable.
2. The importer is accustomed to such terms.
3. Exchange restrictions are severe.
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