Chapter 5: Major Documents Used in Credit Transactions PDF

CHAPTER 5 A credit instrument has two specific characteristics, namely: MAJOR DOCUMENTS USED IN CREDIT TRANSACTIONS 1. The presence of risk involved in that payment is deferred to a...

CHAPTER 5 A credit instrument has two specific characteristics, namely: MAJOR DOCUMENTS USED IN CREDIT TRANSACTIONS 1. The presence of risk involved in that payment is deferred to a later date, and LEARNING OUTCOMES 2. The debtor-creditor relationship is stressed. 1. Know and explain what a credit instrument 2. Explain the nature and importance of credit instrument, and There are obvious advantages attached to a credit instrument. The 3. List and describe the different classes and kinds. of credit instruments obligations of the debtor and the rights of the creditor are set in clear and definite terms. The rate of interest charged is fixed in the contract. Should Although not all credit transactions are supported by the use of a written any dispute or misunderstanding occur, the parties merely have to produce contract as, for instance, when an individual buy from the neighborhood the written instrument and a settlement could be reached on the basis of sari-sari store on credit worth a few pesos or so, there are a number of set terms and conditions. advantages which justify the use of documents popularly known as credit instruments. This applies with particular reference to transactions that Credit instruments may be transferred to third parties through negotiation. involve fairly large sums of money. In industrial production processes, capital equipment is obtained through long-term credit. Most creditors cannot wait long for the repayment of In the first place, a verbal promise on the part of the debtor could be the debt. Thus, credit instruments should permit creditors to maintain some subject of misunderstanding, if not dispute, between the parties to the degree of liquidity. The sale or assignment of credit instruments allows the credit transaction. This is because, such an implied promise could be vague individual creditor to obtain funds without necessarily waiting for the and indefinite as to terms. Moreover, human memory is at times weak and maturity of the credit contract. Furthermore, credit instruments help to fallible. reduce the creditor’s risk because he can diversify his financial investments by buying claims on a variety of debtors. On the other hand, the debtor or With respect to a written contract, it is precise in its terms and constitutes a borrower can sell his notes to hundreds of potential creditors and thus be permanent record of the transaction. Furthermore, a written contract could able to raise funds for the purchase of equipment needed. at times be transferred to a third party should a need arise. Advantages of Transferable Credit Instrument: Not all credit transactions require a written agreement, like when someone 1. Borrowers can receive long-term credit made possible by the durable buys on credit from a small neighborhood store for a small amount. charane of capital goods. However, written agreements, or credit instruments, are useful, especially when dealing with larger amounts of money. 2. The creditor is under no obligations to extend relationship with any ghe debtor for any definite period of time. He can sell the credit instrument and One reason is that a verbal promise from the borrower could lead to regain liquidity. confusion or disagreements between both sides. This is because verbal promises can be unclear or hard to remember exactly. People’s memories 3. The marketability of credit instruments allows a diversification of risk aren’t always reliable. through wide variety of credit instruments held by individual creditors. In contrast, a written contract is clear, with specific terms, and serves as a 4. Potential liquidity and diversification of risk induce many persons with permanent record. It can also be passed on to someone else if needed. disposable capital to supply loanable funds for long-term purposes that would otherwise remain idle or limit such loanable fund to the short-term Credit Instruments market. From the foregoing discussions, it is now evident that credit instruments may be described simply as documents which evidence the existence of 5. Negotiable credit instruments are also useful in short-term credit credit transactions. It is an oral agreement to settle an obligation can be because they expand markets aside from reducing risk and increasing drawn into a written contract known as the "credit instrument". A credit liquidity on the part of the creditor. instrument gives property rights to a creditor chargeable against the debtor, embodying all conditions to be mutually agreed upon by both Nature and Importance: parties. A credit instrument has two main traits: Credit instruments are basically documents that show a credit transaction 1. There is risk since payment is delayed; and took place. While an agreement to pay back a debt can be made verbally, it 2. It emphasizes the relationship between the debtor (the one who can also be put into writing, which is what we call a credit instrument. This owes money) and the creditor (the one who is owed money) document gives the creditor certain rights over the debtor, and it includes all the terms and conditions that both sides agree to. There are clear benefits to using a credit instrument. It outlines the responsibilities of the debtor and the rights of the creditor clearly. The Nature and Importance 1 interest rate is agreed upon in the contract. If a dispute arises, the written that restrict acceptability. Some creditors such as commercial banks prefer document can be used to settle the matter based on the agreed terms. short-term maturity in as much as substantial amounts pose greater risk. Or, it may be that the instrument could be endorsed only thrice. In the case Credit instruments can also be transferred to others, allowing creditors to of government bank checks and postal money orders, these could only be regain their money without waiting for the debt to be fully paid. For endorsed once. example, in industries, long-term credit is used to buy equipment. Since most creditors don’t want to wait a long time for repayment, credit As to Acceptability instruments help them by allowing them to sell the contract and get their money sooner. This also lowers the risk for creditors because they can An instrument can be either widely or narrowly accepted (limited or spread their investments across different borrowers. On the debtor’s side, unlimited acceptance). Instruments that are easily passed between people they can sell their notes to many creditors, helping them raise money for without concerns about their source, similar to how money is used, are equipment or other needs. considered widely accepted. Examples include government-issued money and private bank notes. However, in situations like war or poor government Advantages of Transferable Credit Instruments: financial decisions, people may lose trust in government money, making it less widely accepted. 1. Borrowers can secure long-term credit to buy durable goods like equipment. The acceptability of private bank notes depends on the trust in the bank that issued them. If people hear rumors of bad banking practices, they may 2. Creditors don’t have to maintain a long-term relationship with the debtor be hesitant to accept these notes. For this reason, the government ensures and can sell the credit instrument to regain liquidity. a bank is financially strong before allowing it to issue notes to maintain public confidence. 3. The ability to sell credit instruments reduces risk for creditors because they can hold a variety of credit instruments. Other instruments are more limited in acceptance, meaning they depend on the creditworthiness of the person or organization issuing them. This 4. The potential for liquidity and risk reduction encourages people with trust can be determined through credit checks. Other factors, like the time spare capital to provide long-term loans instead of only short-term ones. it takes to repay, the amount involved, and any restrictions on the instrument, can also influence whether it’s accepted. For example, banks 5. Negotiable credit instruments are useful in short-term credit because often prefer short-term instruments because large amounts of money over they open up more markets, reduce risk, and improve liquidity for creditors. long periods pose more risk. Some instruments, like government checks or postal money orders, can only be passed along once. CLASSIFICATION Credit instruments are classified according to the acceptability of the As to Form instrument, the form it takes, its functions and even perhaps its source and The credit instrument may either be orders or promises to pay. An order to the parties involved, as well as its negotiable character. pay is generally defined as the order of one person to another to pay a third person money on demand or at a definite future time. On the other hand, a As to Acceptability promise to pay is a vow of one person to pay another money on demand or An instrument may either be of limited or unlimited acceptance. at a definite future time. Instruments that pass from hand-to-hand without question as to its source, and which in effect possess the characteristics of money, are considered of There are three parties to an order to pay, namely, the drawer who gives unlimited acceptable. Government credit money and private bank notes are the order, the drawee who is ordered to pay and the payee who is to examples of this type. In times of war fiscal indiscretion, people may lose receive payment. There are only two parties in a promise to pay, namely, trust in government credit money, causing them to exercise caution in the person promising to pay known as the maker and the one to receive accepting the money. Unlimited acceptance is somewhat affected. payment who is the payee. Orders to pay or promises to pay are payable either on demand or at a future determinable time. The orders to pay may The acceptability of private bank notes depend largely on the issuing bank be in the form of checks, drafts, acceptances, or postal money orders. and when rumors of unsound banking practice exist, these instruments, Promises to pay may be open book accounts, promissory notes, collateral too, may not enjoy general acceptance. Therefore, before the bank is promissory notes, letters of credit and bonds. sanctioned to issue notes, the state must see to it that its financial standing is such that public confidence is maintained. As to Form All other instruments are of limited acceptability as their acceptance is Credit instruments come in two forms: predicated on the credit standing of the issuer. Corresponding credit 1. Orders to pay worthiness could be gauged through credit investigations and analysis. 2. Promises to pay These are other factors that may influence the recipient to accept or reject the instrument: the length of payment time, amount involved, and aspects 2 An order to pay means that one person directs another to pay a third Within these types, credit instruments can also be divided into orders to person a certain amount of money, either immediately or at a specific time pay and promises to pay, depending on how the payment is made or in the future. agreed upon. A promise to pay, is when one person commits to paying another a certain As to Negotiability amount of money, either on demand or at a set future date. Credit instruments are either negotiable or non-negotiable. The negotiation of an instrument is important to credit, enhances it, and has the following In an order to pay, there are three parties involved: positive results. 1. Drawer (the one giving the order) 2. Drawee (the one who is ordered to pay); and The transferee obtains legal title and can sue in his own name. 3. Payee (the one who will receive the payment) If the transferee is a holder for value; without notice, he is free from delime In a promise to pay, there are only two parties: that could be posed against the transferor, except those which nullify the 1. Maker (the person promising to pay); and cor altogether. This makes the transferee obtain a better title than the 2. Payee (the one who will receive the payment) original holder, per provisions of law. Hence, he is not subject to personal defenses like fraud, duress, etc. and those that render the contract void like Both orders to pay and promises to pay can be made for immediate forgery, lack of legal capacity to contract, alteration or similar causes. payment or for payment at a future date. As to Negotiability Orders to pay can take the form of: Checks Credit instruments can be either negotiable or non-negotiable. Negotiable Drafts instruments are valuable in credit transactions and offer several benefits: Acceptances; or Postal money orders First, the person who receives (transferee) the negotiable instrument gets the legal right to it and can sue in their own name if needed. Promises to pay can be things like: Open book accounts Second, if the transferee has accepted the instrument in good faith Promissory notes (without knowing of any issues), they are protected from most claims Collateral promissory notes against the previous owner, except in cases that would invalidate the whole Letters of credit; and contract (like forgery or lack of legal capacity). This means the transferee Bonds could have a stronger legal claim than the original holder, and is not affected by personal issues such as fraud or duress that may have involved As to Function the transferor. Credit instruments are classified into credit money, commercial credit instruments, and investment credit instruments. The first is used as a COMMERCIAL CREDIT INSTRUMENTS medium of exchange. The second facilitates the use of credit in short-term Commercial credit instruments are subdivided into promises to pay and commercial pursuits. The third is used for long-term credit. This orders to pay. classification further entails subclasses orders to pay and the promises to pay. Promises to Pay 1. Open book account. One of the most common forms of credit (TABLE) instruments, this constitutes the implied verbal promise of the debtor when he buys consumable goods on credit. The creditor enters this in the Credit instruments serve different purposes and are classified into three ledger to show the existence of the credit transaction. The listing may not main types: be as formal as in bookkeeping, but one that is simply noted and kept by a 1. Credit money store owner. In other establishments, this is entered as accounts receivable 2. Commercial credit instruments; and in the books of accounts. 3. Investment credit instruments 2. Promissory note. A promissory note is an unconditional written promise Credit money is used as a medium to exchange goods and services, like of the maker to pay a sum certain in money to the bearer on order or regular money. demand at a future determinable time. Commercial credit instruments help with short-term business transactions. This type of credit instrument is utilized either by commercial enterprises or banks. It is decided improvement over the open book as it is in writing and, Investment credit instruments are for long-term borrowing and lending. in most cases, contains the essentials of negotiability. However, not all promissory notes are negotiable. A promissory note evidences the 3 purchase of goods or services on credit as well as the advance of capital. 2. Orders to pay The creditor uses this account upon appraising the credit worthiness of the debtor. Promissory notes may appear on financial statements either as Promises to Pay: assets or liabilities. 1. Open Book Account: This is one of the most common forms of credit. The open book account still predominates in businesses, where credit When a person buys goods on credit, they make an informal verbal promise transactions on smaller scale are concerned. Neither retailers nor to pay. The store owner or creditor notes this down in their ledger to track wholesalers would require the signing of notes by their customers unless the transaction. In more formal settings, this would be recorded as the latter's credit standing were below par. Furthermore, the debtor may "accounts receivable." Open book accounts are typically used for smaller either take advantage of the cash discount or not, with promissory notes, transactions. he has no such choice. The inflexibility and inconvenience of the promissory note inhibit its use. They are more prevalent in the field of banking. 2. Promissory Note: This is a written, unconditional promise by the borrower (the maker) to pay a certain amount of money to the holder (the 3. Collateral promissory note. This is just like the ordinary promissory note, bearer) on demand or at a specific time in the future. It’s commonly used in except that the collateral is indicated on the surface or on a separate businesses and banks. Unlike an open book account, a promissory note is document. The collateral usually has values over and above the loan written and more formal, often including details that make it negotiable, granted. Such may be in the form of shares of stocks and bonds, as but not all promissory notes are negotiable. While this is more secure than evidenced by warehouse receipts or those pledged under chattel mortgage an open book account, it is less flexible because the debtor can’t take or trust receipts. advantage of discounts for early payment. This type of credit instrument has the same advantages as the promissory 3. Collateral Promissory Note: Similar to a regular promissory note, this note and also the same disadvantages of inflexibility and inconvenience. includes collateral—assets like stocks, bonds, or property, which act as However, it is more secure than an ordinary promissory note in that there is security for the loan. The collateral is often worth more than the loan itself. some property held on deposit to assure payment of the debt. This makes it safer for the creditor but still shares the disadvantages of being less flexible. The borrower’s ability and willingness to pay still need to Nevertheless, in the case of promissory notes of all kinds, the credit be thoroughly checked. worthiness of the borrower must be subjected to thorough investigation as the settlement of such notes depend largely on the willingness and ability 4. Commercial Letter of Credit: This is a promise from a bank to pay a of the borrower to pay. And while these notes do not contain unconditional certain amount on behalf of a customer, usually for international trade. The promise to pay, lax investigative procedures may lead to unnecessary court bank ensures payment to the seller if the buyer fails to do so. It usually action or delayed settlement, not to mention probable losses from bad includes specific details such as the maximum amount, the time it remains debts. valid, the required documents, and the quality and quantity of goods to be shipped. The bank’s promise makes it easier for businesses to trade with 4. Commercial Letters of Credit. A commercial letter of credit is a written confidence. promise on the part of the bank to honor drafts drasen against it or for its account specified beneficiary or his order, under the specifications Letters of Credit contained in the of credit. In effect, the bank is substituting its credit for According to mode of transmission, the circular and the specially advised. that of the applicants of the letter of credit. 1. Circular. A letter of credit is called a circular when the opening bank This instrument is used widely in financing foreign trade letter of credit issues a letter addressed generally to persons or companies indicating its usually contains, among other details, the following: intention to honor the drafts of beneficiaries under specified terms. a. The maximum amount covered. 2. Specially advised. When the opening bank notifies the beneficiary b. The length of time it will be in force, which usually takes into directly through a notifying bank (usually a correspondent bank), the letter account period of shipment and drawing of drafts. of credit known as specially advised. c. Documents that must be attached as well as manner of disposal Letters of credit can be classified by how they are transmitted: so that payment could be made. 1. Circular: This type of letter of credit is issued by the bank and addressed d. Quantity and quality of the merchandise to be shipped. generally to various people or companies. It informs them that the bank will honor drafts from specific beneficiaries, as long as certain conditions e. Instruction on how the drafts are to be drawn. are met. Commercial credit instruments are divided into two types: 2. Specially Advised: In this case, the bank sends the letter of credit directly 1. Promises to pay; and to the beneficiary through another bank, often a partner or correspondent 4 bank. This direct notification ensures the beneficiary is fully informed of the 1. Simple. When the opening bank carries an account in the currency to be terms and conditions. paid—with the paying bank, the reimbursement is simply accomplished by book entries that include the service charge. According to duration of the substitution of credit, revocable or irrevocable letter of credit. 2. Reimbursement. When the paying bank prefers to receive the reimbursement by draft, or when the two banks have no interbank 1. Revocable. Whenever the bank withdraws or modifies the credit accounts, the method is called reimbursement. The amount reimbursed substituted for the buyer by using such phrases as "good until canceled of shall include commissions and interest, as the case may be. buted for certain period of time), is known as a revocable letter of credit. Based on the method of reimbursement, letters of credit can be classified 2. Irrevocable. When the bank waives its right to cancel the credit or revoke into: the same prior to the date specified, this is known as an irrevocable letter of credit. 1. Simple: In this method, the opening bank and the paying bank have an account with each other in the currency of the payment. Reimbursement is Letters of credit can also be classified based on their duration and the done through book entries, which include any service charges. ability to cancel them: 2. Reimbursement: When the paying bank prefers to receive the 1. Revocable: This type of letter of credit can be changed or canceled by reimbursement through a draft or if the two banks do not have accounts the bank at any time before its expiration date. The bank will use phrases with each other, the method involves issuing a draft. The reimbursement like "good until canceled" or similar terms to indicate that it can withdraw amount includes any commissions and interest, if applicable. or modify the credit as needed. According to the method of payment, a letter of credit may be classed as 2. Irrevocable: Once issued, an irrevocable letter of credit cannot be negotiation, straight, sight, acceptance, local currency or foreign currency, changed or canceled by the bank before the specified date. The bank indicating how payment is going to be effected. commits to honoring the credit as agreed, providing greater security to the beneficiary. 1. Negotiation. If it is a circular letter of credit, payment is termed as negotiation. According to obligations assumed by the bank, there are confirmed and unconfirmed letters of credit. 2. Straight. If it is specially advised, payment is straight. 1. Confirmed. When the advising bank, upon instructions of the opening 3. Acceptance. If payments are to be effected with time drafts subject to bank, assumes the obligation to perform the undertaking stipulated in the acceptance. letter of credit, it is considered confirmed. 4. Local currency. If stipulation directs that the drafts be paid in the 2. Unconfirmed. When the advising bank does not assume any other currency of the seller. obligation except that of notifying the beneficiary, then it is an unconfirmed letter of credit. 5. Foreign currency. If the payment should be made in foreign currency, whether that of the buyer's or not. Letters of credit can be categorized based on the obligations assumed by the bank: 6. Other classification include assignment, back-to-back, red clause and letters of credit. Their descriptions are: 1. Confirmed: In this type, the advising bank (usually a correspondent bank) agrees to take on the responsibility to fulfill the terms of the letter of credit Assignable. Since the exporter may not necessarily be the the as instructed by the opening bank. This adds an extra layer of security for letter of credit should be assignable. For this reason, the the beneficiary. important think party. Hence, the manufacturer (other than the exporter) avails of of credit that the exporter could transfer by 2. Unconfirmed: Here, the advising bank only informs the beneficiary about request a letter manufacturer assignment letters of credit to the letter of credit but does not take on any additional responsibility finance the production of the goods involved. beyond that. The opening bank remains solely responsible for honoring the credit. Back-to-Back. When the original letter of credit contains no provision favor of the company bank issues a domestic letter of According to method of reimbursement, there is what is known as the credit in supplying the goods. The original letter of credit and the simple method and the reimbursement method. secondary domestic letter of credit will cancel out-back-to-back-the credit. The bank issuing the back back letter 5  of credit may require from the exporter some security or a ge 4. Revolving: This type of letter of credit is used repeatedly with a set limit. undertaking Once the credit amount is used up, it is automatically replenished to the same amount, allowing for multiple transactions over time. Red-clause. When the importer has complete confidence in the exporter, latter may be allowed to withdraw funds to purchase It is possible for a letter of credit to be all the same time irrevocable the goods under the terms of an irrevocable confirmed letter of confirmed, local currency, back-to-back, revolving. The different credit. However, the benefician undertakes to deliver the shipping classification spell out the conditions attached to it or the tenor of the documents on or before the expiration of the date of credit. letter of credit should be borne in mind that not all banks use the same classification uniformly. As a matter of fact, a bank may deviate from the Revolving. In order to effect control in the use of credit, a common usage and may adopt a system of its own in setting apart one revolving letter of credit is used. A certain limitation in the letter of credit from another. amount of credit is placed. For example, a letter of credit worth $50,000.00 is established to favor of an exporter. He will then The parties involved in a letter of credit are the importer, the export and make the necessary shipment as specified within a certain period the bank. The banks may either be the issuer of the letter of credit the of time. When the amount is exhausted it is automatically confirming bank, paying bank or negotiating bank. Such distinctions will replaced by the same amount that goes on until negotiations are depend upon the role played by each in letter of credit financing. terminated. The principle underlying the letter of credit is substitution of credit Based on the method of payment, letters of credit can be classified into between the banks involved in negotiation. The buyer, in the final analysis. several types: This is evident not only between the buyer and the issuing bank, but as will 1. Negotiation: This is used with a circular letter of credit. Payment is made have to reimburse the bank for whatever advances it may have made. through negotiation, where the credit can be transferred and paid to different parties. The issuing bank will likewise reimburse the banks involved in the financing process. For example, the bank that confirms the letter of credit will be 2. Straight: In a specially advised letter of credit, payment is made directly, eventually paid through interbank settlement. typically without any additional negotiation steps. Traveler's letter of credit. A traveler's letter of credit is similar in 3. Acceptance: Payments are made with time drafts, which are bills of intent to the commercial letter of credit. The bank's credit exchange that must be accepted by the buyer before payment is made at a standing is likewise substituted for that of the trauder. However, future date. its use is to provide the trav enroute. It is a circular letter of credit in the sense that it is addressed to a of correspondent banks. 4. Local Currency: If the letter of credit specifies that payment must be made in the currency of the seller's country, it is a local currency letter of It is usually issued together with a letter identifying the traveler. A list of credit. correspondent banks that also furnished the traveler along with a cable code. As he reaches a port of call, the traveler presents the letter of credit 5. Foreign Currency: If the letter of credit requires payment in a currency to the correspondent bank and the identification letter. He then draws a different from the seller's local currency, it is a foreign currency letter of draft for the amount reedent not to exceed the amount on the letter of credit. credit. Banks make notations on the letter of credit upon honoring the draft. The last bank that honor's the drafts shall be reimbursed the Other Classifications: respective amount paid by them. The issuing bank, upon receiving the reimbursement from the traveler, cancels the letter of credit to relieve 1. Assignable: This type allows the exporter to transfer the credit to borrower from further liability. Sometimes, however, the traveler may have another party, such as a manufacturer, to help finance the production of already paid the bank the necessary amount and charges imposed. In which goods. case, only the interbank settlements will be made. 2. Back-to-Back: This involves two letters of credit. The original letter of A letter of credit can have multiple classifications at the same time, such as credit is used to obtain a second, domestic letter of credit to finance the being irrevocable, confirmed, in local currency, back-to-back, and revolving. shipment of goods. The second credit is backed by the original one. Each classification specifies different conditions or features of the letter of credit. It's important to note that banks might use their own systems for 3. Red-Clause: This allows the exporter to withdraw funds before shipping classifying letters of credit, which may differ from standard practices. the goods. The exporter must then provide the shipping documents before the letter of credit expires. Parties Involved: 1. Importer: The buyer who requests the letter of credit from their bank. 6  2. Cashier's/manager/treasurer's 2. Exporter: The seller who receives the letter of credit and ships the goods. 3. Certified and; 4. Traveler's 3. Banks: Various banks involved can include: Issuing Bank: The bank that issues the letter of credit. Sometimes, bank drafts are also checks. Confirming Bank: The bank that confirms and adds its guarantee to the letter of credit. A personal check, sometimes known as business check, has the same Paying Bank: The bank that pays the amount due under the letter definition as the general check. This is the most widely used by both private of credit. Individuals and businessmen. It is distinct in that its drawer is an individual. Negotiating Bank: The bank that negotiates the credit and facilitates the payment process. A cashiers/manager's/treasurer's check is also an order to pay. When the cashier of a bank, in his official capacity, draws the order against the bank's Principle: tund, it is called a cashier's check. It may be used to pay the bank's obligation or provide the customer with a more acceptable form of credit The key principle behind a letter of credit is the substitution of credit instrument, since a bank enjoys more confidence than an individual. among the involved banks. Essentially, the issuing bank’s credit is substituted for the buyer's credit. The buyer must reimburse the issuing When the drawer is a company manager and the funds belong to the bank for any advances made. The issuing bank, in turn, reimburses other company, it is called a manager's check. The acceptability of this check banks involved in the transaction, like the confirming bank, through depends on the reputation of the firm. When the drawer is the treasurer of interbank settlements. an organization, be it a bank, a commercial firm or a mutual benefit association, and the funds which it is drawn is owned by any one of these Traveler’s Letter of Credit: organizations, then it is treasurer's check. The distinction is again made according to who draws the che and whose funds are used. A traveler’s letter of credit is similar in concept to a commercial letter of credit but is used to provide funds to travelers while they are on their A certified check is originally a personal check. However, to enhance doubt journey. It is a circular letter of credit addressed to a network of bank certification is required by the recipient of check. The check is then correspondent banks. brought to the bank and the bank representative acceptability in case of checking depositor ledger and debiting the amount "Certified" followed by 1. The traveler is issued a letter of credit along with an identification letter. his signature and the date the check. Thus, when presented of the check stamps the of certification across the face for payment even at a much later 2. At various locations, the traveler presents the letter of credit and date, the cannot reject payment for reasons of insufficient funds, tether, identification to correspondent banks. material a or stop payment order, or other defects. This is so because the check shall have or stop payment onded for payment. Drawer liability is 3. The correspondent banks provide funds up to the amount specified in thus taken over by te by virtue of its certification. the letter of credit. A traveler's check is a variation of the traveler's letter of credit. The form 4. The banks involved make notations on the letter of credit upon honoring differs in that it comes in convenient sizes and dollar denominations. It is the drafts. also an order by the bank president. t to pay the holder of the check. The checks are encashed together with a record slip. There are two signature 5. The final bank that honors the drafts is reimbursed by the issuing bank. spaces on the check surface. A blank is reserved for the traveler to sign with each use while a pre-existing signature serves as his identification. 6. The issuing bank cancels the letter of credit once reimbursement is Traveler's checks are not legal tender. complete, relieving the traveler of further liability. If the traveler pays upfront, only interbank settlements are necessary. Some aspects related to checks. One may have come across other dea classifications such as a crossed checks post-dated checks, stale checks, ORDERS TO PAY rubber e bouncing checks, canceled checks and others. They were so-called Orders to pay used in commercial activities may come in the form of checks, because of the peculiarity attached to them. A crossed check is meant for drafts or acceptance. deposit or for a specifel purpose only. The crossing of a check is done to limit further negotiation. Thi check bears two parallel lines on the left Checks upper corner. Sometimes, there are specific instruction written or none at Generally, a check is an order of a depositor to his bank to pay a sum all. certain in money to a third person or himself on demand. A post-dated check is dated beyond the date of deposit or actual issuance. Checks are further classified into: For example, if a check were brought for deposit on December 29, 2022 or 1. Personal earlier than January 2, 2023, then it would be a post-dated check as far as 7 the bank is concerned if it were issued in payment for something delivered earlier than January 2, 2021 December 29,2022, then it would be 1. Crossed Check: Marked with two parallel lines on the upper left corner, considered a post-dated check by the recipient It could then be deposited indicating it can only be deposited into a bank account and not cashed (if crossed) only on January 2, 2023 or a few days late presented for directly. This limits further negotiation. encashment if not crossed also on January 2, 2023 or thereafter. 2. Post-Dated Check: Dated for a future date. It should not be deposited or On the other hand, if the check in the example were to be deposited cashed until the date specified. If presented before this date, it may be presented for payment six months after January 2, 2023, it will be refused. considered stale check. The law states that checks should be presented for payment within reasonable period of time, depending on circumstances. 3. Stale Check: A check that is presented for payment after a long period, Banking practice allows for payment soomes check is declared stale. The typically six months or more from its date. Such checks may be refused safest thing is to present the check for payment soonest after receipt. based on banking practices. Rubber or bouncing checks are those returned to the drawer because they 4. Rubber or Bouncing Checks: Checks returned by the bank due to are not sufficiently covered with funds insufficient funds in the account of the issuer. When the depositor's check is finally cleared and paid by the bank, these 5. Cancelled Check: A check that has been paid by the bank and marked as checks are marked "cancelled". Usually, the bank returns the depositor (for "cancelled." It is returned to the depositor for record-keeping purposes and record purposes) together with the reconciliation check. reconciliation. Orders to Pay Drafts Drafts are orders to pay and are likewise drawn against a drawee to pay a Orders to pay are commonly used in commercial transactions and include third person a sum certain in money on demand at a future determinable checks, drafts, and acceptances. time. Types of Checks: The different types of drafts are the: 1. money order 1. Personal Check: Issued by an individual or business and drawn on the 2. bank draft issuer’s own account. It is widely used and is essentially a direct order from 3. trade or commercial draft the account holder to the bank to pay a specific amount to a third party or 4. sight or demand draft and time draft, which may either be time to the issuer themselves. date or time sight. 2. Cashier's/Manager's/Treasurer's Check: A money order may either be a bank money order or postal money order. When the order is drawn by a bank on another bank or its branch to pay a Cashier's Check: Issued by a bank using its own funds. This type of check is specified payee, this is a bank money order. When the order is from one considered more reliable because it’s backed by the bank’s funds rather post office to another, it is a postal money order. Usually, the buyer of the than an individual’s. money order receives the draft in exchange of cash. He also pays a nominal service charge. The money order is presented for payment at the post Manager’s Check: Issued by a company’s manager on behalf of the office of the payee or at a commercial bank in the payee's town or company’s funds. Its acceptability depends on the company's reputation. province, (or even country in case of international money orders). It can only be endorsed once and its term is limited. If not paid within said period, Treasurer’s Check: Issued by a company’s treasurer, or an organization’s the buyer should make representations with the post office or bank where treasurer, using the organization’s funds. it was purchased, so that necessary steps could be taken to settle the matter. 3. Certified Check: A personal check that is certified by the bank. This means the bank verifies that the account has enough funds and stamps the A bank draft is an order of a bank to another bank, or that of the depositor check as "certified," making it more reliable. The bank assumes liability if to his bank, to pay a third person a definite sum of money. The bank draft the check bounces. may either be payable on demand or at a future determinable time. 4. Traveler’s Check: Similar to a traveler’s letter of credit, but it comes in A trade or commercial draft is an order to pay used by merchants. It may specific denominations and must be signed by the traveler at the time of also be a demand or time draft. issuance and then again when it is used. It’s used for secure travel funds and is not considered legal tender. A sight or demand draft is payable on sight upon presentation to the drawer. Usually, no future determinable time appears on its face except the Other Check Classifications: date of issue. Hence, after its issuance, it could be presented for payment 8 anytime. at the option of the holder. Time drafts that reach maturity Acceptance automatically become demand drafts. An acceptance is ruinally an order to pay. It is a time draft Hos ensure payment at maturity, the draft is presented for acceptance to the drawn, When the order to pay sets a definite future time for payment, it is called a the drawee accepts he becomes liable and in effect astimes the burden of time draft. The distinction between a time date and time sight draft lies in pat at maturity. This makes acceptance also a promise to pay. Acceptances the reckoning of maturity. In the time date, maturity is counted from the mary be classified as trade or banker's acceptance date of issue of the draft. In the time sight, maturity is counted from the date of acceptance. Both however, are first presented for acceptance and Trade acceptance is an order of the seller to the purchaser to pay a certain then for payment at maturity. This assures payment upon maturity that sum of money at a stipulated future time. If the purchaser accepts the enhances its acceptability in credit transactions. terms, he writes "Accepted” across its face together with his signature and the date of acceptance. Drafts Banker's acceptance is when the bank accepts an order to pay that is Drafts are orders to pay a specified amount of money and are drawn presented to it, and accepts the terms thereon. The bank's representative against a drawee to pay a third person. They are similar to checks but are stamps the word "Accepted" on the face of the instrument, signs and dates. typically used in different contexts. At times, a bank may accept the draft drawn against it on a time basis and this constitutes a berk promissory note. In such a case, the bank itself is the 1. Money Order: primary debtor. Ordinarily, a bank is only the secondary debtor that assumes liability for a customer upe arrangement. The customer is then Bank Money Order: Issued by a bank, directing another bank or its branch obligated to pay the bank. to pay a specified amount to a designated payee. The buyer pays for the money order with cash and a small service fee. Acceptance Postal Money Order: Issued by a postal service, directing payment from Acceptance refers to the act of agreeing to pay a draft at a specified future one post office to another or a commercial bank in the payee's location. date. Similar to a bank money order, it is typically purchased with cash and includes a service charge. It can only be endorsed once and must be An acceptance is essentially an order to pay, typically a time draft. To presented for payment within a limited time. If not paid within this period, ensure payment at maturity, the draft is first presented to the drawee. the buyer must contact the issuing post office or bank for resolution. When the drawee accepts the draft, they become liable for the payment at maturity, transforming the acceptance into a promise to pay. 2. Bank Draft: An order from a bank to another bank or from a depositor to their own bank to pay a certain amount to a third party. Bank drafts can be 2. Types of Acceptances: payable on demand or at a future determinable time, depending on the terms specified. Trade Acceptance: This occurs when a seller orders a purchaser to pay a specified amount at a future date. If the purchaser agrees, they accept the 3. Trade or Commercial Draft: Used by merchants and can be either a draft by writing "Accepted" on it, along with their signature and the date. demand draft or a time draft. It facilitates transactions between businesses This indicates that the purchaser has agreed to the terms and will pay the and is a common form of credit instrument in trade. amount due when the draft matures. 4. Sight or Demand Draft: Payable upon presentation (i.e., on sight) to the Banker's Acceptance: This involves a bank accepting an order to pay drawer. There is no future determinable time stated except for the date of presented to it. The bank's representative stamps "Accepted" on the draft, issue. This means it can be presented for payment immediately. Time signs it, and dates it. Sometimes, a bank might accept a draft drawn against drafts, once they reach maturity, become demand drafts. it on a time basis, which is treated as a bank promissory note. In this case, the bank acts as the primary debtor, whereas typically, it serves as a 5. Time Draft: Specifies a definite future time for payment. It can be further secondary debtor, assuming liability for a customer’s draft. The customer classified into: remains responsible for paying the bank. a. Time Date Draft: Maturity is calculated from the date of issuance. INVESTMENT CREDIT In the realm of investment credit, the instruments used are promises to b. Time Sight Draft: Maturity is calculated from the date of pay, which are in the form of bonds, long-term notes and evidences of acceptance. ownership in a corporation. Both types are first presented for acceptance and then for payment at Bonds and Long Term Notes maturity. Bonds are long-term promissory notes issued under a corporate seal, usually in large sums and in a series. The principal is paid at maturity and 9 interest is paid on the bond at evenly spaced intervals such as quarterly, for the corporation. Besides, a stockholder does not actively participate in semi-annually or annually. Bonds are used to raise funds for a corporation management and leaves this to the board of directors. Even if he does use that needs expansion or reorganization. Bonds are generally classified his privilege to vote, this is at times only a matter of routine rather than according to security, purpose amount or interest the bondholder will conscientious deliberation on his part. In most instances, he votes by proxy. receive, manner of interest payment, and manner of principal payment. Hence, the difference between a stockholder and a bondholder is simply Investors are thus guided to buy bonds on the basis of such classifications. one of legal priority in the event of liquidation, and also in income yield. As in promissory notes, bonds are also given specific maturities Evidences of Ownership Long-term promissory notes. The only distinction between a promissory note and a long-term promissory note is the length of payment. Between Although not a traditional credit instrument, evidences of ownership, such bonds and long term notes, it would also be a matter of time and the intent as stocks, are included in discussions of investment credit due to their role of the corporation issuing them. It may be said that bonds are special types in providing capital to corporations. of long term notes for basically, both are promises to pay with payment terms of five years or more. Definition: Evidences of ownership, primarily shares of stock, represent an ownership stake in a corporation. When someone buys stock, they are Investment Credit essentially providing capital to the corporation, similar to lending funds. Investment credit instruments, primarily used for long-term financing, Stockholders Role: include bonds, long-term promissory notes, and evidences of ownership in a corporation. Investment: By purchasing shares, a stockholder provides financial resources to the corporation. 1. Bonds: Bonds are long-term promissory notes issued by corporations or governments, usually in large denominations. They are formalized with a Management Participation: Stockholders typically do not manage the corporate seal and involve a promise to pay back the principal amount at corporation directly. Instead, they elect a board of directors to handle maturity, with interest payments made at regular intervals (e.g., quarterly, management tasks. semi-annually, or annually). Voting: Stockholders have the right to vote on corporate matters, but often Purpose: Corporations issue bonds to raise funds for expansion, do so by proxy rather than personal participation. restructuring, or other large-scale projects. Comparison with Bondholders: Classifications: Bonds are classified based on various criteria such as: Legal Priority: In the event of liquidation, bondholders have a higher claim Security: Whether they are backed by collateral or are unsecured. on the corporation’s assets compared to stockholders. Bondholders are paid before stockholders. Purpose: The specific use of the funds raised. Income Yield: Bondholders receive fixed interest payments, while Amount: The size of the bond issue. stockholders may receive dividends, which are not guaranteed and can fluctuate based on the corporation's performance. Interest: The rate at which interest is paid. Stock ownership differs from bonds primarily in terms of income yield and Payment Terms: How and when the principal and interest are paid. legal priority during liquidation. Bonds are a form of debt, with fixed returns and a higher claim on assets, while stocks represent equity, with 2. Long-Term Promissory Notes: Long-term promissory notes are similar to variable returns and residual claims on assets. bonds but are typically issued for a period extending beyond one year, often five years or more. Stock Certificate This instrument evidences part ownership of a corporation's capital through Comparison with Bonds: While both are promises to pay with long-term purchase of a share of stocks. It is not, however, a promise to pay. The maturity, bonds are generally issued in larger amounts and are more corporation is not even under obligation to declare dividends even if standardized, whereas long-term promissory notes might be more flexible earned. If dividends are declared, the stockholder shares according to the in terms of terms and conditions. Essentially, bonds can be seen as a type of stock he owns. In the event of liquidation, he is paid his specialized form of long-term promissory notes. commensurate claim only after bondholders and other creditor claims are settled. EVIDENCES OF OWNERSHIP While this is not an actual credit instrument, it is classified as such owing to The two principle types of stocks are: the fact that the stockholder is in effect lending his funds to provide capital 1. Common - simply indicates part ownership in the corporation. 10  2. Preferred - besides evidencing part ownership, gives the Pre-Emptive Right: Stock rights are typically given to existing shareholders stockholder added privileges of control, income or risk. to maintain their proportional ownership and control in the corporation. This right ensures that shareholders can prevent dilution of their ownership Stock Certificate stake. A stock certificate is a document that represents ownership in a New Issue Price: Shareholders can purchase additional shares at a price corporation, showing the number of shares owned by an individual. It is an often lower than the market price. This is known as the subscription price. evidence of ownership but does not serve as a promise to pay. Purpose: The issuance of stock rights usually occurs when a corporation Ownership: A stock certificate signifies that the holder owns a portion of decides to increase its authorized capital stock by amending its articles of the corporation's capital. However, owning a stock certificate does not incorporation. This often happens to raise new capital for expansion or entitle the holder to a fixed return or guarantee dividends. other purposes. Dividends: The corporation is not obligated to declare dividends. If Process: Stock rights are distributed to existing shareholders in proportion dividends are declared, they are distributed based on the type of stock held to their current holdings. Shareholders can choose to exercise their rights, by the stockholder. buy more shares, or sell their rights to others. Liquidation: In the event of liquidation, stockholders are paid only after Stock rights provide an opportunity for shareholders to maintain their bondholders and other creditors have been settled. This reflects the ownership percentage and influence in the company when new shares are residual nature of stockholder claims. issued. Types of Stocks: 1. Common Stock: Represents basic ownership in the corporation. CHAPTER 6 TERMS AND DATINGS Common stockholders have voting rights and may receive dividends, but these are not guaranteed. LEARNING OUTCOMES 1. Know and explain lack of uniformity in terms; 2. Preferred Stock: Offers additional privileges compared to common stock. 2. List and understand the several factors in fixing terms; and 3.Explain and note other terms governing trade transactions Preferred stockholders usually receive dividends before common stockholders and may have a higher claim on assets in the event of As has been aptly pointed out in books on economics and finance, a credit liquidation. transaction is one in which goods, services or other values are exchanged with promises to pay for them in the future. The time element, which Preferred stock can also include additional rights such as control features or involves the determination as to when payment shall be made, is generally reduced risk. governed by the terms of sale, commonly referred to and indicated on bills or invoices as "terms". The terms measure or specify the credit period. Overall, stock certificates represent ownership interests with varying levels of rights and claims depending on the type of stock. In the course of business operations and development, the adjectival term "dating" came into wide and popular use to express a modification of the Stock Right usual terms, by which the time of payment is extended on account of This refers to the pre-emptive right attached to ownership of a share of certain circumstances or contingencies. Obviously, dating becomes part and stock. The original stockholder is given the option to purchase additional parcel of the terms of the credit period. shares of stocks at the new issue price before such stocks are offered to the public. The principle underlying this is for the original owners to maintain Usage as well as custom over a long span of years have contributed to the their proportionate control and income in the business. The issue of establishment in the various trades, sets of terms peculiar to each. These additional stocks happens when a corporation amends its articles of terms are referred to as "regular". In discussing an account or in giving incorporation to increase its authorized capital stock. references, it has become axiomatic to say that "the account is being sold on regular terms." Stock Right In credit transactions, goods, services, or other values are exchanged with a A stock right is a privilege granted to existing shareholders that allows them promise to pay in the future. The timing of this payment is governed by to buy additional shares of stock before the new shares are offered to the "terms" specified on bills or invoices, which outline the credit period. public. 11 The term "dating" refers to a modification of the standard payment terms, 1. the nature and use of the commodity, allowing for an extended payment period due to specific circumstances. 2. the location, This adjustment becomes part of the agreed credit terms. 3. the circumstances of the customer, 4. the purpose behind the purchase, Over time, different industries have developed their own standard "regular" 5. the credit standing of the buyer, and; terms based on custom and usage. These regular terms are often 6. the regulations enumerated in codes of fair practices. referenced when discussing or giving details about credit accounts, indicating that the account follows established industry practices. The Commodity as a Factor The nature of the commodity generally circumscribes the terms of sales. Lack of Uniformity in Terms Perishable products, like fish, vegetables and poultry are generally sold on As a matter of business practice, however, one is constrained to note very the cash basis, or close to cash terms. In the case of the latter, they are little uniformity in the use of terms. While in some trades, the cooperation subject to very short terms. of some groups of grantors of credit has made it possible to establish and accordingly enforce. uniform terms, nevertheless, in order trades where It is axiomatic that products belonging to the category of basic necessities such cooperation is non-existent, terms are frequently modified, not to say are highly saleable because the demand for them is almost universal, at times, even disregarded. compared to luxuries and non-essential items which has limited markets. The former is generally sold on in the cash basis while the latter on credit As a general observation, terms vary in different trades. In fact, at times, terms, oftentimes, to spark sales of luxuries and similar others, discounts even within the same trade, business houses sometimes differ in the terms are at times offered as well as credit terms. Furthermore, piano, household granted. Furthermore, it is possible that the same seller may differ in the appliances are often sold on installment basis which cover long periods of terms granted to customers, and sometimes in the terms granted to the payment. same customer. This is frequently practiced as borne by a desire to gain a competitive advantage, sometimes though, this is the result of pressure Construction materials are generally obtained by well-known from the same buyers who do business on a large scale basis. manufacturing firms engaged in housing projects and/or in the construction of buildings on deferred payment. This is quite understandable since they Experience, however, has shown time and again that advantages so do not only extend large volume of business to suppliers of construction obtained are of short duration. This may be explained by the fact that materials but moreover on a year-long basis variation in terms, by and large, is at best only an artificial competitive weapon, and thus, any advantage which it seems to have, usually proves to Transactions that largely involve labor which is paid on cash by the seller be a delusion. It ordinarily results only in the buyer’s playing one seller are usually kept on cash or very short terms. Charges for the performance against another, and in creating an unwholesome situation in the trade. of labor on the material of the customer may vary from net cash to net 60 days. It need not be strongly stressed that fair terms, adhered to generally in the trade make for wholesome practices and, in the long run, benefit the buyer Some heavy agricultural equipment such as harvesters, threshers are sold as well as the seller. on the installment basis, the seller receiving cash through the finance company and the purchaser enjoying ample time with which to pay. So are In business, there is often a lack of uniformity in credit terms. While some bulldozers and road graders and other heavy equipment. industries have established and enforce consistent terms, others do not, leading to significant variations. This inconsistency can occur within the The nature of the commodity significantly influences the terms of sale. For same industry or even with the same buyer, sometimes due to competitive perishable goods, such as fish, vegetables, and poultry, transactions are strategies or pressure from large-scale buyers. typically conducted on a cash basis or very short credit terms due to their limited shelf life. Despite attempts to gain competitive advantage through varying terms, such strategies usually provide only temporary benefits. Variations in terms Basic necessities, which have broad and consistent demand, are often sold often lead to buyers leveraging differences to pit sellers against each other, on a cash basis. In contrast, luxury items and non-essentials, which have creating unhealthy market conditions. more limited markets, are frequently sold on credit terms. To boost sales, sellers of luxury goods may offer discounts and extended credit terms. Overall, maintaining fair and consistent terms across the industry promotes Products like pianos and household appliances are commonly sold on better practices and benefits both buyers and sellers in the long term. installment plans that allow for extended payment periods. FACTORS IN FIXING TERMS Construction materials are usually sold on deferred payment terms to Generally speaking, there are several factors that come into consideration established companies involved in large projects. This arrangement benefits in the fixing of terms. suppliers by securing large, ongoing business. Among such factors are the following: 12 Labor-intensive services, where labor is paid in cash, are generally kept on schedule for seasonal goods. Unlike regular terms applied to immediate cash or very short terms. Charges for labor on customer materials can range shipments, seasonal dating is used for goods that have a specific demand from immediate payment to terms extending up to 60 days. cycle, such as raincoats, umbrellas, school bags, or uniforms. Heavy agricultural equipment, like harvesters and threshers, and For example, a manufacturer or importer may accept advance orders for construction machinery, such as bulldozers and road graders, are often sold products that will be needed later, allowing them to plan production and on installment plans. In these cases, sellers may receive payment through a manage inventory more effectively. This also benefits buyers by aligning finance company, while buyers benefit from longer payment periods. delivery and payment schedules with their seasonal demand. Geographic Considerations A practical instance is bookstores in the Visayas placing orders for textbooks In a number of instances, the seller recognizes the distant location of the with publishers early in the summer. This advance ordering ensures that buyer, and accordingly make a concession in the matter of terms. This may they have the necessary books available for the back-to-school season in be represented by an extra 30 days time in which to pay the bill, or by August, meeting customer demand efficiently. allowing a longer period for the taking of the discount. Thus, where the discount would ordinarily be deductible only if the bill is paid 15 days from Terms in Retail Trade its date, the seller may allow the buyer cash discount upon making Most retailers, if not all, grant credit to their buyers who continue to extend payment 15 days after receipt of the goods. In such cases, the terms are their patronage through the years. The terms of retail credit may vary from sometimes expressed as "15 days, ROG." that is, 15 days from receipt of one retailer to another. As a common practice, though, such buyers are goods. required to make monthly payments to cover part of their outstanding obligations. Geographic considerations can influence the terms of sale to accommodate the logistical challenges faced by buyers in distant locations. In the provinces, good customers make it a point to tender partial Sellers may extend payment terms or modify discount periods to address payments from time to time in accordance with agreements between these challenges. For example, if a buyer is located far from the seller, the sellers and buyers. seller might offer an additional 30 days to pay the bill or extend the discount period. In retail trade, credit terms are often customized and can differ significantly from one retailer to another. Generally, retailers offer credit to loyal In practice, this means that if a discount is typically available only if the bill customers, allowing them to make monthly payments towards their is paid within 15 days from the invoice date, the seller might adjust the outstanding balance. This arrangement supports ongoing customer terms to allow the discount if payment is made within 15 days after the relationships and helps retailers manage cash flow. goods are received. Such terms are often noted as "15 days, ROG" (Receipt of Goods), indicating that the payment terms start from the date the buyer In provincial areas, it is common for good customers to make periodic receives the goods, not from the invoice date. partial payments based on mutual agreements with sellers. This flexible payment approach helps both parties maintain a good business relationship Seasonal Dating and manage their financial obligations effectively. The "regular terms" of trade usually apply to shipments of orders received for delivery at once. Like, for instance, pulp and paper for use in printing or Standing of the Customer newspaper publications. However, in many lines of a seasonal nature, it is It need not be stressed herein that there exists a correlation between the necessary to place so called "advance" orders, that is, orders for later grant of credit and the time of payment. Until such time as payment is delivery, to coincide with the market demand for such goods like raincoats made, credit risk is ever present. For this reason, some conservative and umbrellas. Or school bags to use during the opening of school. And, of businessmen refuse to sell goods on credit to those customers with course, school uniforms for boys and girls. doubtful character—and certainly, with unknown capacity to pay. In some cases, the seller may opt to sell to him a very limited quantity of goods on Such orders give the manufacturer or importer time to get the merchandise credit terms. Sometimes, the credit period may be reduced, that is from 45 ready thus to enable him better to plan and to operate more economically. days to 15 days or so. He may receive the orders in advance, which are to be shipped at a certain date. The standing of the customer plays a crucial role in determining credit terms. The level of credit risk associated with a customer is directly related Some book stores in the Visayas place their orders for the needed to their payment history and financial reliability. To mitigate this risk, textbooks with publishers as early as the advent of the summer months conservative businesses may refuse to extend credit to customers with which enable them to meet and fill in the demand for such books during questionable backgrounds or unknown financial capacity. In cases where the opening of the school in August. credit is granted, it may be limited to a small quantity of goods or have shortened payment periods, such as reducing the credit term from 45 days Seasonal dating refers to the practice of adjusting payment terms to to 15 days. This cautious approach helps protect businesses from potential accommodate the timing of the buyer's needs and the seller's production financial losses due to unpaid debts. 13  Under this arrangement, it is understood that all shipments made during a Cash Terms the month and the terms run from the last day they were made on the last Where it is intended not to extend credit under any terms whatsoever, it day of should be made clear that goods shall be delivered to the buyer only when the seller obtains receipt of funds corresponding to value of goods ordered. For example, shipments made on any day during September are treated as This practice is in accord with “Cash before Delivery”. Or the abbreviated dated as September 30. When the terms are, for instance, 2 per cent, 10 term, CBD. This applies specifically to transactions in which the seller days, the change to 2 per cent, 10 days. E.O.M. means that the September receives the cash payment as a condition to delivery of goods, an ironclad bills are on the tenth of October, instead of being payable on 10 days from protection to the seller's interest. their various dates in September. The most common practice in business transactions is known popularly A modification of the E.O.M. arrangement is sometimes adopted. This under the abbreviated term COD, which stands for its equivalent, "Cash on provides for two payments a month. Under the plan, all bills dated from Delivery”. For their protection, not a few businessmen insist that cash first to the fifteenth of the month are considered as dated from the payments be tendered by buyers or by a corresponding certified check sixteenth to the end of the month and are considered as dated the last day issued by the buyer. Where buyers and sellers have established long years of the month. of satisfactory relationship, this practice is done away. Some businessmen are more than willing to transport their goods to their valuable customers Other departures from the regular terms occur in order to meet even in the absence of a promise to pay. competitive conditions or the special exigencies of the buyer. Thus in a buyer's market, the sharp buyer for no good reason at all, may ask for the Cash Terms extra dating. Likewise, the seller may yield to the importunities of buyers who plead special circumstances as the opening of a new store, the putting Cash Terms in business transactions typically refer to the requirement for up of a new building. Special dates, the limitation upon purchases for a payment before or upon delivery of goods. period are among the reasons commonly adduced or given. Cash Before Delivery (CBD): In this arrangement, the seller demands The assumption is that the buyer must keep his financial affairs in good payment in full before delivering the goods. This ensures that the seller's order, and this angle is usually considered in connection with the request interest is protected, as the transaction is completed only when the seller for extra dating. The consent through could mean the aggravation of a risk has received the payment. although at times there may exist some justifications in exceptional cases where the set-up is essentially sound. Cash on Delivery (COD): This more common practice requires the buyer to pay for the goods at the time of delivery. Payment can be made in cash or Many factors are at work to justify the shortening of terms. The business by a certified check. For established customers with a reliable payment turnover has been considerably quickened. This is due to more rapid history, sellers might waive this requirement, trusting them to fulfill facilities for distribution, and the tendency to buy in smaller quantities and payment commitments even in the absence of a formal promise. carry less stock. OTHER TERMS In some lines, too, the intervention of finance companies in installment At this point, let us take note of other terms governing trade transactions. transactions enables manufacturers to realize cash on their shipments at Doubtless, while they are known through their abbreviations which are the time of their delivery. commonly used in trade, nevertheless, it is correct to say that their essential feature or features will help contribute differentiating them from End of Month one another. Briefly, they are: The "End of Month" (E.O.M.) arrangement is a common practice designed End of Month to streamline payment terms for both buyers and sellers, especially in Frequency of purchase or other circumstances may make necessary for industries with frequent transactions. certain special treatment of individual cases. One such special arrangement is the "E.O.M." or "End of Month". Standard E.O.M. Arrangement: This arrangement springs from the need of the active buyer for Definition: All shipments made during a month are considered to have convenience in making payments, and from the desire of sellers to occurred on the last day of that month for payment purposes. encourage the concentration of business. E.O.M. makes it necessary for the buyers to issue checks to the seller throughout the month in order to earn Example: Shipments made in September are treated as if they were made discounts. It also help facilitate the seller's bookkeeping. In many lines, this on September 30. If the terms are 2% discount, 10 days E.O.M., the arrangement is no longer confined to the active accounts, but is allowed, payment is due by October 10, not 10 days from each individual shipment's generally speaking. date in September. 14 Varia