Mr Ellison's company owns a chain of petrol stations and garages. He is also a customer of Barnley's Bank and has also asked for an overdraft, but in his case the bank is not willing to lend him the money.
1. What two things have influenced the bank manager's decision not to allow a credit in this case?
2. Why did Mr Ellison want the credit?
3. Was the bank manager sympathetic?
4. Did he offer an alternative, which might help Mr Ellison raise the money?
BARNLEY'S BANK Ltd
Chairman: B. Davenport F.I.D.
Mr P. Ellison Date: 19 November 20—
Ellison & Co. Ltd.
Bridgend IF31 3DF
Dear Mr Ellison,
I am sorry to inform you that we will not be able to offer the credit you asked for in your letter of 14 November.
You have had an overdraft in the past year, which partly influenced our decision, but there is also a credit squeeze at present, which has particularly affected loans to the service sector of the economy. I sympathize with you when you say that you have been offered a rare opportunity to expand your business if you can secure the £ 15,000 additional capital. With regard to this, may I suggest that if there are no other possibilities for you to raise the money, perhaps you could approach a Finance Corporation who might be willing to help.
I am sorry that we have to disappoint you in this matter, and hope that we may be of more help in the future.
I. Evans Manager
At 6.2.2 we looked at various methods of payment used in foreign trade. In this section we look in detail at two methods of payment, bills of exchange and documentary credits, and the way in which they involve banks at home and abroad.
Bills of exchange
A bill of exchange is an order sent by the drawer (the person asking for the money) to the drawer (the person paying) stating that the drawer will pay on demand or at a specified time the amount shown on the bill. If the drawer accepts the bill, he will sign his name on the face of it and date it. See 9.6.2.
The bill can be paid to a bank named by the drawer, or the drawer can name a bank he wants to use to clear the bill, as happens at 9.6.2. If this is the case, the bill will be kept in the drawer's bank until it is to be paid. When the bill is due it is presented to the paying bank. Such bills are said to be domiciled with the bank holding them.
A sight draft or sight bill is paid on presentation. In a documents against payment (D/P) transaction, the sight draft is presented to the importer with the shipping documents, and the importer pays immediately, i.e. 'on presentation' or 'at sight'.
A bill paid 'after date' or 'after sight' can be paid on or within the number of days specified on the bill. Therefore, '30 days after sight' means that the bill can be paid 30 days after it has been presented.
Overseas bills in the UK are known as foreign bills, and those used within the UK as inland bills. A clean bill is one that is not accompanied by shipping documents.
The advantage for the exporter of payment by bill is that the draft can be discounted, i.e. sold, to a bank at a percentage less than its value, the percentage being decided by the current market rates of discounting. So even if the bill is marked 90 days, the exporter can get his money immediately. The advantage for the importer is that he is given credit, provided the bill is not a sight draft. The bank, however, will only discount a bill if the buyer has a good reputation.
Bills can be negotiable if the drawer endorses the bill. If Mr Panton, the beneficiary of the bill at 9.6.2, wanted to pay another manufacturer, he could write on the back of the bill, i.e. endorse it, and the bill would become payable to the person who owned it. Mr Panton can endorse it specifically, i.e. make it payable only to the person named on the bill.
It is possible to send the bill direct to the importer, if he is well known to the exporter, or if not, to his bank which will hand it to him with the documents for either acceptance or payment.
A dishonoured bill is one that is not paid on the due date. In this case the exporter will protest the bill, i.e. he will go to a notary, a lawyer, who will, after a warning, take legal action to recover the debt.
The abbreviations B/E for bill of exchange and d/s for days after sight are often used. And you are now familiar with D/P, documents against payment and D/A, documents against acceptance.
Specimen letters and form: bill of exchange transactions