Edward G.

Hinkelman

INTERNATIONAL PAYMENT

4th Edition
World Trade Press
Chapter 11:
Documentary Credits,
Part 2: Settlement
(Making Payment)

2
 Overview
• Settlement refers to the process of payment of the
beneficiary(ies) to the credit after presentation of
documents under the credit. Utilization, availability of
payment and settlement are all closely related and often the
terms are used interchangeably.
• Utilization is the process of the seller shipping the goods,
presenting documentation and getting paid. Availability and
settlement are part of the same process, but refer more
specifically to the seller getting paid.
• There are three primary means of settlement:
(1) settlement by payment,
(2) settlement by acceptance, and
(3) settlement by negotiation.
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 Settlement by Payment
• If the credit is an irrevocable, confirmed credit, the value of
the credit is available to the beneficiary as soon as the
terms and conditions of the credit have been met (as soon
as the prescribed document package has been presented to
and checked by the confirming bank).
• In an unconfirmed credit the value of the credit is made
available to the beneficiary once the advising bank has
received the funds from the issuing bank. See the following
chapter for information on confirmed and unconfirmed
credits.

4
 Settlement by Acceptance
• In settlement by acceptance the beneficiary presents the
required documentation package to the bank along with a
time draft drawn on the issuing, advising, or a third bank for
the value of the credit.
• Once the documents have made their way to the buyer and
found to be in order, the draft is accepted by the bank upon
which it is drawn (the draft is now called a bank
acceptance) and it is returned to the seller who holds it
until maturity.

5
 Settlement by Negotiation
• In settlement by negotiation the buyer accepts the
documents and agrees to pay the bank after a set period of
time.
• This gives the buyer time (a grace period) between delivery
of the goods and payment.
• The issuing bank makes the payment at the specified time,
when the terms and conditions of the credit have been
met.

6
 Settlement by Payment
• Procedure
Refer to the diagram on the facing page for each numbered
step.
• Seller
1. The seller (beneficiary) ships the goods to the buyer and
obtains a negotiable transport document (negotiable bill of
lading) from the shipping firm/agent.
2. The seller prepares and presents a document package to
the advising/confirming bank consisting of (a) the
negotiable transport document, and (b) other documents
(e.g., commercial invoice, insurance document, certificate
of origin, inspection certificate, etc.) as required by the
buyer in the documentary credit.
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 Settlement by Payment
• Advising/Confirming Bank
3. The advising/confirming bank:
(a) reviews the document package making certain the
documents are in conformity with the terms of the credit,
and
(b) pays the seller.
4. The advising/confirming bank then sends the
documentation package by mail or by courier to the issuing
bank.

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 Settlement by Payment
• Issuing Bank
5. The issuing bank:
(a) reviews the document package making certain the documents
are in conformity with the terms of the credit and
(b) pays or reimburses the advising/confirming bank as previously
agreed (in the documentary credit).
6. Sends the document package by mail or courier to the buyer.
• Buyer
7. The buyer pays or reimburses the issuing bank as previously
agreed.

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10
 Settlement by Acceptance
• Procedure
Refer to the diagram on the facing page for each numbered step.
• Seller
1. The seller (beneficiary) ships the goods to the buyer and
obtains a negotiable transport document (negotiable bill of
lading) from the shipping firm/agent.
2. The seller prepares and presents a document package to the
advising/confirming bank consisting of (a) the negotiable
transport document, (b) other documents (e.g., commercial
invoice, insurance document, certificate of origin, inspection
certificate, etc.) as required by the buyer in the credit, and (c) a
draft drawn on the bank at the specified tenor (maturity
date). 11
 Settlement by Acceptance
• Advising/Confirming Bank
3. The advising/confirming bank:
(a) reviews the document package making certain the
documents are in conformity with the terms of the
documentary credit, and
(b) accepts the draft and returns it to the seller.
4. The advising/confirming bank then sends the
documentation package along with a statement that it has
accepted the draft by mail or by courier to the issuing bank.

12
 Settlement by Acceptance
• Issuing Bank
5. The issuing bank:
(a) reviews the document package making certain the
documents are in conformity with the terms of the
documentary credit and
(b) at maturity of the draft pays or reimburses the
advising/confirming bank as previously agreed (in the
documentary credit).
6. Sends the document package by mail or courier to the buyer.
• Buyer
7. The buyer pays or reimburses the issuing bank as previously
agreed (in the documentary credit).
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14
 Settlement by Negotiation
• Procedure
Refer to the diagram on the facing page for each numbered step.
• Seller
1. The seller (beneficiary) ships the goods to the buyer and
obtains a negotiable transport document (negotiable bill of
lading) from the shipping firm/agent.
2. The seller prepares and presents a document package to the
advising/confirming bank consisting of (a) the negotiable
transport document, (b) other documents (e.g., commercial
invoice, insurance document, certificate of origin, inspection
certificate, etc.) as required by the buyer in the credit, and (c)
a draft drawn on the bank.
15
 Settlement by Negotiation
• Advising/Confirming Bank
3. The advising/confirming bank:
(a) reviews the document package making certain the
documents are in conformity with the terms of the
documentary credit, and
(b) pays the seller.
4. The advising/confirming bank then sends the
documentation package by mail or by courier to the issuing
bank.

16
 Settlement by Negotiation
• Issuing Bank
5. The issuing bank a) reviews the document package making
certain the documents are in conformity with the terms of
the documentary credit and b) pays or reimburses the
advising/confirming bank as previously agreed (in the
documentary credit).
6. Sends the document package by mail or courier to the
buyer.
• Buyer
7. The buyer pays or reimburses the issuing bank as previously
agreed (in the documentary credit).
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