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6.

Means of Payment: Cheque, Bill of Exchange


Payment by cheque
A cheque is a written order to the bank to pay money from your account. The drawer writes
a cheque and gives it to the payee. If a cheque has got 2 lines across it, it is called a crossed
cheque and can only be paid into a bank account. The words account payee show that it
can only be paid into the account of the person, whose name is on the cheque. Whereas an
open cheque is not crossed and can be cashed if the drawer writes pay cash or pay
bearer.
The things written on a cheque:
o The name of the drawers bank,
o date,
o cheques number,
o the short code that identifies the bank or the branch,
o drawers name,
o signature and account number,
o the payees name and
o the amount payable in numbers and letters.
When the cheque is torn out, the slip that remains in the book is called the counterfoil or
heel.
Cheques are cleared trough the clearing system. When the payee presents the cheque at the
bank, the amount is credited to his account and the cheque is transferred to the drawee
through the clearing system. The clearing house reconciles the amounts banks owe each
other. This process takes a few days.
Types of cheque:
1. open cheque: it doesnt have 2 parallel lines drawn across it. It can be paid out to
whoever presents it at a bank; isnt very safe.
2. crossed cheque: has 2 parallel lines across the face of the cheque from bottom to top. It
serves safety purposes, their amount may be paid only into the payees
banking account and cant be exchanged for cash except by the drawer
at his own bank, or at another bank with the use of credit card.
3. dishonoured cheques: The cheque is not accepted and referred back to the payees
bank if the drawer hasnt got enough money in his account to
cover payment;or the cheque has been incorrectly made out: there
are missing data, illegible handwriting, the signature seems very
different from the previously given ones or unacceptable
corrections are made on the cheque. When a cheque is refused for
payment the drawers bank will write: refer to drawer the
cheque and return it the payee who must find out from the drawer
why the cheque has not been honoured. Reasons for ex.:
- cheque contains an error or is unsigned
- signature differs from specimen held at the bank

- cheque has been altered/post-dated


- cheque is stale more than 6 month old
- drawer doesnt have sufficient funds in account
Endorsement: consists of the signature of the person to whom the cheque is passable on
the back of the cheque
1. Blank (general) endorsement on a cheque is an endorsement which does not
state that it must be paid to, or to the order of, any named
party. It will therefore be paid to the person who presents it.
The payee ( endorser) simply signs his name on the back of the
cheque.
2. Special (full endorsement) on a cheque is one which states the name of the
person (endorsee) to whom or to whose order, the cheque is
passable.
3. Restrictive endorsement on a cheque is one which forbids further negotiation
of the cheque.

Bill of exchange
A bill of exchange (B/E) is a written order without any condition addressed by the
drawer (creditor) to the drawee (debtor), signed by the person who is giving it requiring the
person to whom it is addressed to pay on demand (immediately) or at a stated time a certain
sum of money to an entitled person or to the one bearing the bill (to the bearer). A bill of
exchange is sometimes called a draft, especially, if payment is arranged from one bank to
another.

The sight draft it is made out payable at sight, i.e. on demand.

The term draft is payable at a fixed or determinable future time. In this case the
buyer receives a period of credit, known as the tenor of the bill. The buyer signifies
an agreement to pay on the due date by writing an acceptance across the face of the
bill.
The bill or draft may be drawn on the importers or a bank. The drawee - usually the
bank which issued the credit - accepts the bill against correct documents. The value of the
bill is guaranteed if it is accepted by a well-known bank. This means that the bank will
honour it when the bill matures and take on the risk and work of collecting payment plus the
commission from the importers. The fact that the bill has tenor (lejrat) of one or more
months means that the importers get credit for that period of time. At the same time the
exporters may obtain their money by selling the bill on the discount market. The buyer
discounts it by paying face value minus the discount, which is the interest on the bill for the
remainder of its tenor. At maturity, the holder presents the bill to the accepting house for
payment. The interest is determined partly by the status of the accepting house, the bank,
and partly on the interests prevailing on the discount market at the time. A first-class name
means a lower rate. The higher the rate, the greater the discount and the less the value of the
bill in market.
By using a bill of exchange sent with other shipping documents trough the banking
system an exporter can ensure greater control of the goods, because until the bill is paid or
accepted by the overseas buyer, the bank will not normally release the shipping documents,
so the buyer is unable to take delivery of the goods. The collecting bank presents the bill to
the drawee, for immediate payment if it is a sight draft, or for acceptance if it is a term draft.

This procedure is known as a clean bill collection, because there are no shipping documents
required. But, it is more likely, that the bills are used in a documentary collection method of
payment. In this case, an exporter sends the bill to the buyer trough the banking system with
the shipping documents, including the original bill of lading.
An exporter can even use the banking system for cash against documents (CAD)
collection. In this case only the shipping documents are sent and the exporter instructs the
bank to release them only after payment by the overseas buyer.
In all methods of payment using a bill of exchange, a promissory note (sajt vlt) can
be used as an alternative. This is issued by a buyer, who promises to pay an exporter a
certain amount of money within a specified time.
When negotiating terms of payment the buyer can request that the supplier draws a
term or usance bill of exchange (C/A). The supplier will be extending credit, but it is
sometimes possible for him, by special arrangement with his bank, to obtain payment from
them before maturity of the bill which calls for the payment after certain number of days.