The letter of exchange must contain the following indications in order to be negotiable:
- It is written and signed by the drawer;
- It carries an order to pay a certain sum;
- It is payable immediately or on a definitive maturity date;
- It is payable on order or to the bearer.
Different types of classifications of drafts are as follows:
Sight draft or term draft. A sight d raft is payable on presentation. A term draft is
payable at the end of a defined period, say, 30, 60 or 90 days. It is presented to the
drawee who should accept it. If it is the importer who accepts it, it means a trade
acceptance. If it is accepted by a bank, it is bank acceptance. In a term draft, a credit is
accorded by an exporter to the importer.
Simple draft or documentary draft. If it is a simple draft, no document is enclosed
with it. Simple drafts are rarely used in international trade; documentary drafts are
preferred instead. The use of a documentary draft assures the exporters that the importer
cannot take possession of goods without paying (documentary demand draft) or without
recognition of debt (documentary term draft).
Draft issued in national currency or in foreign currency. This classification is based
on the currency in which the draft is drawn. If drafts are drawn in foreign currency, they
will have to be brought on spot or at term.
Other Techniques of Settlement
At the outset, it may be noted that the techniques of payment vary from country to
country. The major techniques followed in this regard are enumerated below:
- International Bank Transfer
This is an order given by a debtor (importer) to a bank to pay to creditor (exporter). The
sum payable may be in the national currency or in a foreign currency. This mode of
settlement is very much used in France.
Cheque
In international trade, there exist two types of cheques:
- The cheques of a company which is drawn on a bank account. It should be
certified by a bank so that the exporter can have the guarantee of being paid. - The cheques of a bank are the cheques drawn by a bank on another bank. It can
be made in the national currency or a foreign currency. The beneficiary of the
cheques of bank is assured of payment.