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Major Documents used in Credit Transactions

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Jazel Ü Capellan

on 11 December 2013

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Transcript of Major Documents used in Credit Transactions

Kinds of Bill of Exchange:


When a person signs his name, with or without qualifications, to a credit instrument for a purpose of transferring it to another, he performs the act of endorsement. Negotiable instruments which are payable to the bearer can be transferred from person to person without formalities.
Credit Instruments
The paper which contains in writing the obligation of the debtor and the right of the creditor. Credit instruments may differ depending on the purpose, customs and laws of the government. The term “credit instruments” is used in a rather narrow sense as constituting merely bills of exchange and promissory notes.
Investment Credit Instruments
Major Documents used in
Credit Transactions

Characteristics of Credit Instruments:
 Payable to bearer
 Payable to order
 Payable on demand
 Payable at a future time

Commercial Credit Instruments
. Charge Accounts

- It simply an arrangement between the seller and the buyer.

Trade Acceptance

- It is described as an acknowledgment of a debt by the buyer in favor of the seller.
Not all credit transactions are supported by the used of written contract as, for instance, when an individual buys from the neighborhood sari-sari store on credit worth a few pesos or so, there are a number of advantages which justify the used of documents popularly known as credit instruments. This applies with particular reference to transaction that involves fairly large sums of money.

Credit instruments can be classified as investment credit instruments and commercial credit instruments.
Investment credit instruments
are those which earn income in the form of dividends or interest.
Commercial credit instrument
s are substitutes for money on a business transaction.
Credit instruments can be classified as investment credit instruments and commercial credit instruments.
Investment credit instruments
are those which earn income in the form of dividends or interest.
Commercial credit instrument
s are substitutes for money on a business transaction.

are promises to pay the principal as well as the interest to the holder at a certain specified time indicated on the face of the instrument.

are permanent invested capital of a corporation contributed by the owners which are evidence by certificates.

Common stocks
Preferred Stocks
Arguments favoring the use of the trade acceptance:
The use of trade acceptance will increase working capital, "liquefy credit".

It is easier for he businessman to borrow by discounting trade acceptance at a low rate of interest than to pledge his open accounts.

The trade acceptance will lead to prompter payment.

Losses from bad accounts will be reduced as a result of the use of the trade accounts.

The general application of the trade acceptance will make it possible to plan business operations.

By the use of the trade acceptance the purchaser will be "educated" in many desirable ways.
Promissory Notes

- It is a written promise to pay a sum of money on demand or on a definite future date to a designated person or bearer.

Kinds of Promissory Notes:

Negotiable Promissory Notes - are unconditional and impose few to no duties on the issuer or payee other than payment.

Non-negotiable Promissory Notes - It is known as a non-transferable. Popularly known as I.O.U
Bill of exchange
It is an unconditional signed written order addressed by one person to another to pay on demand or at a specified future date a certain sum of money to order or bearer.
a. Foreign bill
b. Domestic bill or inland
Types of Bill of Exchange:
a. Sight drafts or Sight bill
b. Time bill

The business world is familiar with the growing popularity in the use of acceptance for reasons not hard to explain. An acceptance is in the form of a draft, that is, an order drawn by one person upon a bank or another party directing it to pay a stated sum of money either to the drawer or to some third person. If the drawee agrees to
it, meaning to honor the draft, the instruments become commercial papers.

Bank draft -
It is drawn by a bank upon another bank where it maintains an account.
Bank money order

- the order is drawn by a bank on another bank to pay specified payee.
Bank Acceptance
- It is similar to trade acceptance except that the order to pay is drawn upon a a bank by the seller of goods.
Credit Card
- the holders are able to purchase goods and services on credit card against payment on the future.

It is a written and signed order of a depositor upon a bank to pay on demand the order of the bearer or designated person a specified sum of money.
Kinds of Checks:
Open Check.
This is either payable to bearer. This instrument does not require presentation through a payee’s banking account. It has current date on its face, and can be encash on demand.
Crossed Check
. This is determined by the presence of two parallel lines on the left corner. It must be presented through a payee’s banking account for deposit.
Certified Check.
Payment to the payee is especially guaranteed by the drawee bank. The bank writes or stamps “certified”, “guaranteed” or “accepted” on the check with the date and signature.
Cashier’s Check/Manager’s Check.
It is drawn upon a bank by the cashier of a business organization. It is also known as treasurer’s check if it is drawn by the treasurer. And if it is the manager who draws the check, it is called manager’s check.
Personal Check.
This is a kind of check in which the drawer is an individual. It is commonly used by individuals and businessmen.
Traveller’s Check
. This is a promise to pay on demand. Even amounts are indicated on the face of the instrument.
Overdraft Check
. This known as “no sufficient funds” check. This is drawn against a depositor’s account where balance is not sufficient to pay the check.
Bouncing Check.
This is an instrument drawn against “no fund”, cases like the depositor has closed his account with the drawee bank.
Stale-dated Check
. A check was date on its face and date of payment or encashment exceeds six months. Banks dishonor this kind of check to protect interest of the depositors. They are requested to see the depositor or drawer and ask for open check replacement.
Post-dated Check
. This is an instrument where the date on the face is a future date considering the day of the encashment or payment. This may be issued by a drawer to coincide with the fulfillment of the future contract or for the reason that to date, drawer may have insufficient fund in his current account.
Advantages of Checks:
Checking Deposit

A major portion of the money supply of countries, especially those with advanced economies, is in the form of demand deposits of banks. These are money of the people which are deposited in banks. They become bank debts payable on demand.
1. Checks are not liable to loss or theft compared to other types of money.

2. Checks can be easily carried from place to place and from payee to payee, regardless of the sum of money.

3. The exact amount of money for payment can be written on the checks, thus, facilitating exchange.

4. Checks can serve as convenient receipts for payment.

Disadvantages of Checks
1. Checks may not be accepted from an unknown person.

2. Signatures may be forged or the amount may be changed.

3. It is sometimes inconvenient to cash, cash in banks especially if the amount involved is small.

4. The possibility of overdrawn checks or bouncing checks may happen.

Negotiable Credit Instruments

Most credit instruments, especially checks, have been widely used because of their qualities of saleability and transferability. And above all because of their legal quality of negotiability. In accordance with the law, the seller is a “holder in due course” which means he has independent right.

The characteristics of negotiability have been given only to checks, commercial drafts, promissory notes and a few other instruments of credit. All other kinds of properties are merely assignable which means the assignee (buyer) can only obtain rights in the property which are equal to the rights of the assignor (seller). Any defect in the title is passed along from the seller to the buyer.

Requirements of Negotiable Instruments
1. It is writing and signed by the drawer or maker.

2. It contains an unconditional promise or order to pay a certain sum of money.

3. It is payable on demand or at a definite future time.

4. It is payable to bearer or to order.

5. It names the drawee with reasonable certainty.

However, there bare qualifications for a person to be able to endorse a credit instrument, to another. These are, among other things:

1. He has a legitimate title to the check.

2. He is authorized to obtain payment in behalf of one who has a good title to the check.

3. It is valid transfer.

4. It is not a fake credit instrument.

5. He is not aware of any insolvency proceedings against the drawer of the check.

Types of Endorsement:
Special endorsement
. It specifies the name of the person to be paid. It applies to check payable to order.
Blank endorsement
. In this case, the instrument was drawn against no specified payee.
Restricted endorsement
. It confines the endorsement to a specific purpose. It limits further negotiation of the instrument, and lessens the risk on the part of the payee under cases where he makes further transfer of the instrument to another holder.
Conditional endorsement.
It requires payment of the check under specified condition.

Qualified endorsement
. It limits the liability of the endorser by the writing the words “without recourse”. This type of endorsement is still negotiable but its acceptance is likely to be adversely affected. This protects the banks in case the checks turn out to be worthless.

Facultative endorsement
. A type of endorsement which uses discretion to forego certain rights guaranteed by law but are waivable.


Holders of credit instruments, such as checks and matured notes for example, hand them to the banks or drawees for payments or acceptance. This act is called “presentment”. It is made at the place and time indicated in the credit instrument. In this case payment or acceptance of the credit instrument is denied, this means it is dishonored.
Other Important Documents
Letter of Credit
A letter of credit may be described as a letter issued by a bank authorizing a designated individual firm or corporation to draw on it up to the total amount for which the credit is established. Commercial letters of credit are used largely in connection with the financing imports and exports of merchandise.
Bill of Lading
. It is a written account of goods shipped by any person, signed by the agent of the owner of the vessel or by its matter, acknowledging receipts of the goods and promising to deliver them safe at the port directed, damages of the sea expected.
Three important purposes are served by a bill of lading, such as:

a. It conveys title to the merchandise.
b. It is a receipt of acknowledgment of the goods signed by the carrier.
c. It serves as a contract of transportation between the shipper and the carrier.

Trust Receipt
. It is a document that is frequently used to protect the bank when it becomes necessary to release the goods called for by the warehouse receipt or bill of lading in order that the borrower may utilize or dispose of them.
The importer binds him to the terms of the trust receipt, such as:

a. The importer will hand to the bank the proceeds from the sale of the imported goods as soon as received.

b. The importer agrees to keep said goods insured to their full value, against fire, the sum insured to be payable in case of loss to the bank.

c. The importer agrees to keep the goods, manufactured products or proceeds, whether in the form of money or bills receivable accounts.

Warehouse Receipts.
It is a written acknowledgment by a warehouseman that he holds the certain goods, identified by the receipt, for the person to whom the writing is issued; also a contract by which the warehouseman agrees to deliver the goods to the holder.
Warehouse receipt need not be in any particular form but every such receipt must embody within its written or printed terms.

a. The location of the warehouse where the goods are stored;

b. The date of the issue of the receipt;

c. The consecutive number of the receipt;

d. A statement whether the goods received will be delivered to the bearer;

e. The rate of storage charges;

f. A description of the goods or of the packages containing them;

g. The signature of the warehouseman, which may be made by his authorized agent;

h. If the receipt is issued for goods for which the warehouseman is the owner;

i. A statement of the amount of advances made of liabilities incurred for which the warehouseman claims a lien.

Obligation to Deliver

A warehouseman, in the absence of some lawful excuse provided by the Warehouse Receipts Law, is bound to deliver the goods upon a demand made either by the holder of a receipt of the goods or by the depositor, if such demand is accompanied with:

a. An offer to satisfy the warehouse lien;

b. An offer to surrender the receipt, if negotiable, with such endorsement as would be necessary, for the negotiation of the receipt;

c. A readiness and willingness to sign, when the goods are delivered, an acknowledgement that they have been delivered, if such signature is requested by the warehouseman.

Liability for Misdelivery

Where a warehouseman delivers the goods to one
is not in fact lawfully entitled to the possession of them, the warehouseman is liable as for conversion to all having right of property or possession in the goods if he delivered the goods otherwise than as authorized by a person who is either himself entitled to deliver. He shall be liable, if prior to such delivery he had either:

a. Been requested, by on behalf of the person lawfully entitled to a right of property or possession in the goods, not to make such delivery;

b. Had information that the delivery about to be made
to one not lawfully entitled to the possession of
the goods.

(From the Latin word “mortus” meaning dead and “vas” signifying a pledge) and the Old French mortgage, literally a deathgage or pledge is a conveyance of property as security debt, which is lost or becomes dead to the debtor if the money or the interest due and not paid on a certain day. Mortgage is the commonly used legal instrument for secured borrowing in business either in its individual or corporate form.
Objects which may be Mortgaged

a. Immovables;

b. Alienable real rights in accordance with the laws imposed upon immovable. Nevertheless, movables may be the object of a chattel mortgage.

Kinds of Mortgage

Chattel Mortgage
. Personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. If the debtor fails to meet the contract, the creditor can take possession and ownership of the property.

Mortgage on real property.
May be on land and buildings, factories, machinery. Torren title on real estate may be pledge to secure loans.

Types of Mortgage

Close-end Mortgage
. It is used to refer to mortgage by a corporation used as collateral security for a loan of a fixed amount. The mortgage, cannot be used as security for additional loans of any kind.

Open-end Mortgage
. Permits the sale of additional bonds at a later date under original mortgage. Under this type of mortgage, a corporation may issue bonds in whatever number it may deem proper under the circumstances and thus, a bondholder who possesses bonds of one of the earlier series under such mortgage.

6. Pledge
Pledge or pawn, in law, is a bailment of goods by a debtor to his creditor to be kept till the debt is charged. The term is used to denote the property which constitutes the security. Pledge is the
of Roman law from which most of the modern law on the subject is derived. In the case of pledge, it is held that a special property passes to the pledgee sufficient to enable him to maintain an action against wrongdoer.
Essential Requisites to Pledge and Mortgage

a. That they be constituted to secure the fulfillment of a principal obligation;

b. That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged.

c. That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they may be legally authorized for the purpose.
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