Modes of Non-LC Payment Terms-D/P

year1992 to year 1993, which Non-LC trading terms first surpass LC term. In other words, since year1992, exporters are more willing to apply more risky payment terms to increase their competitiveness compared to other suppliers. Applying Non-LC payment terms has become non-price bargain power so that every other suppliers or competitors would take the same action to secure their market. Finally, Non-LC payment terms turned out to be the major stream of transactions in international business.

Recent Trend of International Trading

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Total L/C Total Non-LC

Figure 2.1: Recent Trend of International Trading for Past 20 Years

2.2. Modes of Non-LC Payment Terms-D/P

Among the major types of trading terms, L/C is undoubted the lowest risk of payment term with the pay-back guarantee and credibility of issuing bank. However, issuing L/C would unavoidably increase financial costs for foreign buyers as well as make the trading procedures more complicated and time wasting due to banks regulations. As the 2010 figures showed above, only 11.7% of trades leveraged L/C to facilitate the payment procedure. The trend is clear that Taiwanese exporters need a tool with simplified operating procedure and

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financial cost reduction. Thus, the risk concern shall be transferred from issuing banks to foreign buyers and undoubtedly the operation of Non-LC deals have become more and more important at the past few years.

The second payment term with comparatively lower risk is Document against Payment (D/P).

Generally speaking, D/P is an arrangement under which an exporter instructs the presenting bank to hand over shipping and title documents to the importer only if the importer fully pays the accompanying bill of exchange or draft. D/P is also called cash against documents.

There are at least 5 parties involved in the D/P transaction, such as Taiwanese Exporter, Foreign Importer, Shipping Company, Collection Bank, and Associate Bank of Collection.

Each party is very important and has its irreplaceable role to facilitate the trading deal at different stages of D/P procedure. Before going through the trading procedure, I would explain function of each party as the based knowledge as the following:

(1) Local Exporter & Foreign Importer

The function of trading is to bridge the difference and communicate different products or prices all over the world. As long as the difference exists, the trading tractions between exporters and importers will continue to suit each other’s need. Therefore, Local Exporters and Foreign Importers are the very first and important parties to start and bridge the transaction.

(2) Collection Bank

D/P is the second lower risk for trading payment term because of Collection Bank. In real practice, exporters shall prepare many documents, including commercial invoice, packing list, banker’s bill, etc., before delivery. Collection Bank will be the one responsible for

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(3) Associate Bank of Collection

Based on foreign country, the role of Associate Bank of Collection is to review the collection notice from Collection Bank. If the notice meet the shipping documents, Associate Bank of Collection will notify a foreign importer to pay. After making the payment, foreign importers will receive Bill of document for them to take the cargo.

With more understandings of the role and function for trading parties of D/P, it will be clearer to introduce D/P procedure as figure 2.1 shows:

Figure 2.2: Operating Practice of D/P Procedure

The detailed explanation of D/P procedure is as follows:

Step 1: Signing business contract

With negotiation between sellers and buyers, each party would have intention to work together and finally have agreement for the transaction.

Local

(5) Bank Draft, Shipping Doc, Collection Instruction (6) Doc. Notice

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Step 2: Shipping on board

Following the contract, exporters have to prepare the shipment on board.

Step 3: Taking B/L

After shipment on board, the shipping boat will issue “Mate’s Receipt”, which exporters can use to exchange for Bill of Lading (B/L) from the shipping company.

Step 4: Preparing shipping documents to Collection Bank

With all the documents, including banker’s bill, B/L, Invoice, Packing list, and other shipping document, at hand, exporter shall prepare the complete shipping documents to Collection Bank.

Step 5: Preparing collection order and mail all the shipping documents to Associate Bank of Collection

After receiving shipping documents from exporters, the collection bank will follow the instruction of exporter to type the collection order and mail all the documents to foreign Associate Bank of Collection.

Step 6: Notifying importers that the arrival of shipping documents

Verifying the accuracy of collection order with shipment documents and notifying importers.

Step 7: Making the payment and taking the documents

If importers accept the notice from Associate Bank of Collection, then importers will pay for the shipment and take the documents away for cargo.

Step 8 & 9: Using bill of document to exchange D/O¹¹

After paying for the documents, importers can use bill of documents to exchange D/O for taking over goods.

Step 10: Transferring payment to Exporters

11 D/O is the abbreviation of Delivery Order, which is the certificate for importers to take over shipments. http://article.bridgat.com/big5/guide/process/200804/205.html

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Once received the payment from importers, Associate Bank of Collection will give credit advice to Collection Bank. Then, Collection Bank will transfer the payment to local exporters.