Foreign Trade Payment Methods, Bills, Drafts and Letters of Credit for SS 3

Class: SS 3
Term: First Term
Week: 5
Age: 17 years
Duration: 60 minutes
Subject: Store Management
Curriculum Theme: Foreign Trade
Previous Lesson: Freight Notes, Customs Specifications and Import Licences
Topic: Documents used in foreign trade cont.
Subject Matter: Means of payment in foreign trade (a) telegraph transfer (b); Guaranteed mail transfer (c) mail transfer; (d) foreign bill of exchange; (e) Traveller cheque (f) Bank draft, factoring; Letter of hypothetication, letter of credit

Specific Objectives

By the end of the lesson, pupils/students should be able to:

Cognitive Domain

• Define telegraph transfer, guaranteed mail transfer, and mail transfer.
• Explain the concept of a foreign bill of exchange and identify its parties.
• Describe the features and uses of a traveller’s cheque and a bank draft.
• Define factoring and its role in foreign trade.
• State the purpose of a letter of hypothecation.
• Explain the process and types of a letter of credit.

Affective Domain

• Appreciate the importance of secure payment methods in international trade.
• Recognise the risks associated with different payment methods.
• Value the role of financial institutions in facilitating foreign trade payments.

Psychomotor Domain

• Illustrate the flow of a foreign bill of exchange.
• Differentiate between various payment methods through practical examples.

Reference Materials

The following resources were used in planning this lesson:

• 2014 Senior Secondary Education Curriculum (SSEC)
• Relevant State Unified Scheme of Work
• A suitable Store Management textbook for SS 3
• FCT ERC/NAPPS Scheme of work

Instructional Materials

The teacher will teach this lesson with the aid of:

• Whiteboard and markers
• Charts showing examples of a foreign bill of exchange and a letter of credit
• Handouts explaining different payment methods

Rationale for the Lesson

Understanding various foreign trade payment methods is essential for students in Store Management as it directly impacts inventory acquisition, financial planning, and risk management in international transactions. This lesson equips students with the knowledge to navigate the complexities of global commerce, ensuring efficient and secure procurement processes.

Prerequisite/Previous Knowledge

Students should have a basic understanding of international trade, general business transactions, and the concept of documents used in trade.

Lesson Content/Board Summary

Documents used in foreign trade cont.

Means of Payment in Foreign Trade

Telegraphic Transfer (T/T)

Telegraphic Transfer, also known as Wire Transfer or SWIFT transfer, is an electronic method of transferring funds internationally from one bank account to another. It is one of the fastest ways to send money across borders.

1. Process: The remitter instructs their bank to send funds to a beneficiary’s bank account in another country. The banks communicate through secure electronic networks like SWIFT.
2. Advantages: Speed, security (electronic tracking), widely accepted.
3. Disadvantages: Relatively high transaction fees, potential for errors if details are incorrect.

Guaranteed Mail Transfer

Guaranteed Mail Transfer is a method where a bank guarantees the payment of funds sent via mail. While slower than telegraphic transfer, the guarantee provides a level of security against loss or non-delivery of the payment instruction.

1. Process: The remitting bank sends a payment instruction by registered or insured mail to the beneficiary’s bank, with a guarantee of payment upon receipt and verification.
2. Advantages: More secure than regular mail transfer due to the bank’s guarantee.
3. Disadvantages: Slower than electronic transfers, still relies on physical mail delivery.

Mail Transfer

Mail Transfer involves sending payment instructions or actual payment instruments (like bank drafts) through postal services. It is generally the slowest and least secure method among the three transfer types.

1. Process: The remitter’s bank sends a payment order or draft by regular mail to the beneficiary’s bank or directly to the beneficiary.
2. Advantages: Lower cost compared to electronic transfers.
3. Disadvantages: Slow, higher risk of loss or delay, less secure.

Bills, Cheques, Drafts and Factoring

Foreign Bill of Exchange

A foreign bill of exchange is an unconditional order in writing, addressed by one person (the drawer) to another (the drawee), signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person (the payee), or to bearer.

1. Parties Involved:
   1. Drawer: The exporter (seller) who issues the bill.
   2. Drawee: The importer (buyer) who is ordered to pay.
   3. Payee: The party to whom the payment is to be made, often the drawer’s bank or the drawer themselves.
2. Types:
   1. Sight Bill: Payable “at sight” or on demand when presented to the drawee.
   2. Usance Bill (Time Bill): Payable at a future date, e.g., 30, 60, or 90 days after sight or date.
3. Importance: Provides a formal, legally binding instrument for payment, often used with Letters of Credit.

Traveller’s Cheque

A traveller’s cheque is a pre-printed, fixed-amount cheque designed to allow the person signing it to make an unconditional payment to a third party as a result of having paid the issuer for that privilege. They are typically used by individuals travelling abroad.

1. Features:
   1. Issued in fixed denominations.
   2. Requires two signatures (one at purchase, one at encashment/use).
   3. Refundable if lost or stolen.
2. Uses: Safe way for travellers to carry funds without carrying large amounts of cash.
3. Advantages: Security, widely accepted, easy to replace if lost.
4. Disadvantages: May incur fees, exchange rate fluctuations, less common now due to credit/debit cards.

Bank Draft

A bank draft is a cheque drawn by a bank on its own funds, or on funds held by another bank, and signed by an authorised bank official. It is a secure method of payment because the bank guarantees the funds.

1. Features:
   1. Issued by a bank.
   2. Guaranteed by the issuing bank.
   3. Funds are typically debited from the purchaser’s account before the draft is issued.
2. Difference from Cheque: A personal cheque is drawn on an individual’s account, while a bank draft is drawn on the bank’s account, making it more reliable.
3. Uses: Used for large payments, international transactions, or when a high level of payment assurance is required.

Factoring

Factoring is a financial transaction where a business sells its accounts receivable (invoices) to a third party (a factor) at a discount. In foreign trade, it allows exporters to receive immediate cash for their export sales, rather than waiting for the importer to pay.

1. Process:
   1. Exporter sells goods to importer on credit.
   2. Exporter sells the invoice (accounts receivable) to a factor.
   3. Factor pays the exporter an agreed percentage of the invoice value immediately.
   4. Factor collects the full amount from the importer when due.
   5. Factor pays the remaining balance to the exporter, minus fees.
2. Advantages in Foreign Trade: Improves cash flow for exporters, reduces credit risk, simplifies collections, provides financing.

Credit Instruments

Letter of Hypothecation

A letter of hypothecation is a document used in international trade where a borrower (exporter) pledges goods as collateral for a loan or advance from a bank, without transferring possession of the goods to the bank. The bank then has a lien on the goods.

1. Purpose: To provide security to a bank that has granted an advance to an exporter against goods that are still in transit or in the exporter’s possession.
2. How it Works: The exporter signs the letter, giving the bank the right to take possession and sell the goods if the exporter defaults on the loan.

Letter of Credit (L/C)

A Letter of Credit (L/C) is a financial instrument issued by a bank (the issuing bank) on behalf of a buyer (applicant/importer) guaranteeing payment to a seller (beneficiary/exporter) upon presentation of specified documents that comply with the terms and conditions of the L/C. It provides security for both parties in international transactions.

1. Parties Involved:
   1. Applicant (Importer): The buyer who requests the L/C.
   2. Beneficiary (Exporter): The seller who receives payment.
   3. Issuing Bank: The buyer’s bank that issues the L/C.
   4. Advising Bank: A bank (usually in the exporter’s country) that authenticates and forwards the L/C to the beneficiary.
   5. Confirming Bank (Optional): A bank that adds its own guarantee to the L/C, making it a “confirmed” L/C.
2. Process:
   1. Importer and exporter agree on terms, including L/C.
   2. Importer applies to their bank (issuing bank) for an L/C.
   3. Issuing bank issues the L/C and sends it to an advising bank in the exporter’s country.
   4. Advising bank verifies the L/C and informs the exporter (beneficiary).
   5. Exporter ships goods and presents required documents (e.g., bill of lading, invoice) to the advising bank.
   6. Advising bank checks documents for compliance and forwards them to the issuing bank.
   7. Issuing bank verifies documents and pays the advising bank, which then pays the exporter.
   8. Importer pays the issuing bank and receives the documents to claim the goods.
3. Types of Letters of Credit:
   1. Revocable L/C: Can be amended or cancelled by the issuing bank without prior notice to the beneficiary (rarely used).
   2. Irrevocable L/C: Cannot be amended or cancelled without the agreement of all parties involved.
   3. Confirmed L/C: An irrevocable L/C to which a second bank (the confirming bank) has added its guarantee of payment.
   4. Unconfirmed L/C: An irrevocable L/C that has not been guaranteed by another bank.
4. Advantages:
   1. For Exporter: Guaranteed payment if terms are met, reduces credit risk.
   2. For Importer: Assurance that payment will only be made if goods are shipped and documents are correct.

Teaching Methods/Instructional Techniques

Discussion, Explanation, Question and Answer, Guided Practice, Visual Aids

Instructional Procedures

Step 1: Introduction

Time: 5 minutes

Teaching Skill: Recalling/Engaging

Teacher’s Activity: The teacher greets the students and briefly recaps the previous lesson on documents used in foreign trade. The teacher then introduces the current topic by asking students what they think are the challenges of making payments across different countries.

Pupils’ Activity: Pupils respond to the questions and share their thoughts on international payment challenges.

Learning Point: Challenges of international payments

Step 2: Electronic and Mail Transfers

Time: 10 minutes

Teaching Skill: Explanation/Illustration

Teacher’s Activity: The teacher explains and defines telegraphic transfer, guaranteed mail transfer, and mail transfer, highlighting their processes, advantages, and disadvantages. The teacher uses a chart to compare their speed and security levels.

Pupils’ Activity: Pupils listen attentively, ask questions for clarification, and note down key points.

Learning Point: Types of fund transfers

Step 3: Foreign Bill of Exchange

Time: 10 minutes

Teaching Skill: Definition/Analysis

Teacher’s Activity: The teacher defines a foreign bill of exchange, identifies the drawer, drawee, and payee, and explains the difference between sight and usance bills. The teacher shows an example of a bill of exchange on a chart.

Pupils’ Activity: Pupils observe the chart, identify the parties, and ask questions about the bill’s functionality.

Learning Point: Understanding foreign bills

Step 4: Traveller’s Cheque and Bank Draft

Time: 8 minutes

Teaching Skill: Explanation/Comparison

Teacher’s Activity: The teacher explains what a traveller’s cheque and a bank draft are, outlining their features, uses, and how they differ from personal cheques. The teacher discusses their relevance in foreign transactions.

Pupils’ Activity: Pupils listen, compare the two instruments, and note their respective advantages.

Learning Point: Cheques and drafts

Step 5: Factoring

Time: 7 minutes

Teaching Skill: Explanation/Application

Teacher’s Activity: The teacher defines factoring and explains its process, specifically how it helps exporters manage cash flow and reduce credit risk in foreign trade. The teacher provides a simple scenario.

Pupils’ Activity: Pupils listen to the explanation and try to understand the practical application of factoring.

Learning Point: Factoring in foreign trade

Step 6: Letter of Hypothecation and Letter of Credit

Time: 10 minutes

Teaching Skill: Detailed Explanation

Teacher’s Activity: The teacher explains the letter of hypothecation and its purpose. The teacher then provides a detailed explanation of the letter of credit, including its parties, process, and different types (revocable, irrevocable, confirmed, unconfirmed), using a diagram to illustrate the flow.

Pupils’ Activity: Pupils pay close attention to the complex details of the letter of credit, asking questions to clarify the roles of each party.

Learning Point: Credit instruments explained

Step 7: Evaluation/Review

Time: 5 minutes

Teaching Skill: Questioning/Assessment

Teacher’s Activity: The teacher evaluates the learning by asking the following questions:

1. Differentiate between telegraphic transfer and mail transfer.
2. Who are the three main parties to a foreign bill of exchange?
3. State two advantages of using a letter of credit for an exporter.
4. What is the primary purpose of factoring in international trade?

Pupils’ Activity: Pupils answer orally and in writing.

Learning Point: Understanding payment methods

Step 8: Note-Taking

Time: 10 minutes

Teaching Skill: Guided Writing

Teacher’s Activity: The teacher guides pupils/students to copy the essential Board Summary notes on foreign trade payment methods into their notebooks.

Pupils’ Activity: Pupils/students copy the notes carefully into their notebooks.

Learning Point: Recording lesson notes

Step 9: Conclusion

Time: 5 minutes

Teaching Skill: Summarising

Teacher’s Activity: The teacher summarises the key payment methods discussed, emphasising their importance in facilitating secure and efficient international trade transactions. The teacher encourages students to consider the best method for different scenarios.

Pupils’ Activity: Pupils listen to the summary and reflect on the lesson’s main points.

Learning Point: Consolidating payment methods

Continuous Assessment/Further Study

Type: Homework

Instruction: Answer the following questions in your notebook:

1. Explain how a Letter of Credit provides security for both the importer and the exporter.
2. Research and write a short paragraph on why traveller’s cheques are less commonly used today compared to a few decades ago.
3. Imagine you are an exporter selling goods to a new buyer in another country. Which payment method would you prefer and why? Justify your choice based on security and speed.

Lesson Keywords

• Telegraphic Transfer – Electronic fund transfer.
• Mail Transfer – Fund transfer via postal service.
• Foreign Bill of Exchange – Written order to pay.
• Traveller’s Cheque – Pre-printed, refundable payment.
• Bank Draft – Bank-guaranteed payment.
• Factoring – Selling accounts receivable.
• Letter of Hypothecation – Pledging goods as collateral.
• Letter of Credit (L/C) – Bank guarantee of payment.

Differentiation

For students who may struggle, the teacher will provide simplified definitions and focus on the core function of each payment method using more visual aids. Advanced learners will be encouraged to research real-world examples of each payment method and discuss their practical implications in current global trade scenarios.

Suggested Lesson Videos

YouTube search for Foreign Trade Payment Methods SS3 Store Management