Letter of credit: A letter of credit is a document containing the guarantees of bank to honor drafts drawn on it by an exporter, under certain conditions and up to certain amounts, provided that the beneficiary fulfils the stipulated conditions.
Bill of Exchange: The Negotiable Instruments Act, 1881, defines the bill of exchange as ‘an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.
There are five important parties to a bill of exchange:
The Drawer: The drawer is the person who has issued the bill. The drawer is the creditor to whom the money is owned.
The Drawee: The drawee is the person to whom the bill is addressed or against whom the bill is drawn. In other words is the debtor who owes money to the drawer, the creditor.
The Payee: The payee is the person to whom the bill is payable. The bill can be drawn payable to the drawee or his bank
The Endorser: The endorser of a bill is the person who has placed his name and signature at the back of the bill signifying that he has obtained title to the bill and payment is due to him on his account own or on account of the original payee.
The Endorsee: The endorsee is the person to whom the bill is endorsed. The endorsee can be obtained from the drawee.
These are the following important types of bill of exchange:
1. Sight Bill of Exchange: A sight or demand B/E is one which is required to be paid by the drawee immediately on presentation of the bill.
2. Usance Bill of Exchange: The case of the usance to time B/E, there is maturity period called the tenor, and the payment is to be made only on the maturity of the bill.
Generally speaking the due date of payment of the usance bill is calculated from the date of presentation or sighting of the bill by the drawee. Such a bill is called after sight usnace bill. But sometimes the date of maturity is calculated from the date of drawing of the bill. Such a bill is known as after usnace bill.
3. Clean Bill of Exchange: A bill of exchanged not accompanied by the relative shipping documents is known as a clean bill of exchange. In respect of the clean B/E, the documents are sent to the consignee directly, and he can take delivery of the goods on their arrival at the port of destination.
4. Documentary Bill of Exchange: A documentary B/E is a bill exchange accompanied by the relative shipping documents such as the bill of lading, marine insurance policy, commercial invoice, certificate of origin etc. The documents accompanying the bill are delivered to the importer by the bank only upon their acceptance or payment of the bill. The former is called documents against payment. It is the documentary B/E that is commonly used if foreign trade transactions.
Upon shipment of the goods, the exporter may draw a B/L on the importer or, more frequently on bank acting for the importer. The exporter usually draws the bill payable to is own order, or to that of his bank. He then endorses the bill and sells it to, or discounts it at, his bank. In this way the exporter receives his money immediately upon the shipment of the goods. The bank sends the bill and the documents to its foreign branch or correspondent bank which upon arrival promptly notifies the importer and presents the bill to him for payment or acceptance. Until the importer has accepted the bill or made arrangements for payments he cannot receive the bill of lading, which is his title to the goods.