CHAPTER 11
Documentary Credits, Part 2 SETTLEMENT (MAKING PAYMENT)
S E T T L E M E N T R E F E R S 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: settlement by payment, settlement by acceptance, and settlement by negotiation. Each is described briefly below and in greater detail in the pages which follow. 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. 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. SETTLEMENT BY NEGOTIATION
In settlement by negotiation the buyer accepts the documents and agrees to pay the bank after a set period of time. Essentially, 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.
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