Means of Payment

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In today’s Commerce class, We will be learning about Means Of Payment. We hope you enjoy the class!

CONTENT

Factors determining the method of payment
Classifications of means of payment.

Means of payment refer to the various instruments and processes available for the settlement of business transactions or financial indebtedness.

FACTORS DETERMINING THE METHOD OF PAYMENT

The total amount of money involved
The cost of the means of payment
The urgency of payment
The date when payment is due
The type of account kept by the debtor
The wishes and preferences of the creditor
The custom or practices of the particular trade
The safety consideration inherent in the proposed settlement
The distance between the payer and receiver

CLASSIFICATION OF MEANS OF PAYMENT

The various means of payment for settling business or financial transactions in Home Trade can be classified as:

(1) Legal Tender

(2) Payment through bank

(3) Means of Payment provided by the post office

(4) Means of payment provided by Businessmen

Legal Tender

These are means of payment provided by the state. They are available in several denominations of banknotes and coins e.g. N1000, N 500, N 100, 50k, N 1 etc.

2. Payment through the Bank:

The means of payment under this category include

1. - Cheque: this is an instruction to a bank requesting it to pay a stated sum of money to a named payee who presents the cheque for payment.
  - Standing order: This is an instruction by an account holder to the bank to pay a fixed amount of money on his behalf at regular intervals to a named person or organization.
  - Bank Draft: This is a cheque drawn or issued by a bank and also drawn on a bank. It guarantees payment and is therefore preferred by the creditor to a personal cheque issued by the debtor himself.
  - Direct Debit: This is a method in which the payee (the creditor) claims the payment. It is used where the amount involved varies or where payment is made at varying intervals. It is the creditor that makes a demand for payment by sending invoices direct to the debtor’s bank for settlement.
  - Credit Transfer: This operates by the debtor’s bank paying directly into the bank account of the creditor. The debtor would have supplied the name, account number, address of the bank of the creditor to his own bank.

3. Means of payment provided by the Post Office:

- - A. Postage stamps: These are used in paying for small items or to settle debts of small amounts of money. The stamps so collected can be re-used in sending mails.
  - B. Postal Orders: This is used for the transfer of small sums of money. It has the following features:
    1. 1. Issued by the Post Office
      2. Issued in various denominations
      3. Valid for six months from the date of issue
      4. It is not negotiable i.e. the payee cannot transfer it to another person
      5. A commission called POUNDAGE is charged by the Post Office according to the amount involved
      6. It is not a legal tender
      7. It may be crossed in which case it must be paid into a bank account
      8. It may be redeemed (cashed) at a named Post Office or paid into a bank account

- - C. Money orders: These are issued for paying a larger amount of money than postal order

1. 1. 1. 1. It is not negotiable
      2. It may be crossed – in which case it must be paid into a bank account
      3. Higher commission (poundage) are charged compared to Postal orders
      4. It is valid for six months from date of issue

- - D. Telegraphic Money Orders: These are used when speed is needed. An order for payment is telegraphed to the appropriate Post Office for payment to the specified payee.
  - E. Post Office Giro: The post office also keeps accounts e.g. savings accounts for customers. Debts can be settled by transfers from one account to another through giro cheques or transfer orders.

EVALUATION QUESTIONS

Classify means of payment under the following headings

(a) Legal tender (b) Banking system (c) Post office

What are the advantages of making payment by standing order

4. Means of Payment provided by Businessmen:

1. 1. Bill of Exchange: This is a bill drawn by the creditor (the seller of the goods) on the debtor (the buyer) whereby the debtor is instructed to pay a sum of money within a period of time, say three months. The bill must be accepted by the debtor.
  2. Promissory Note: This is a note issued by a debtor which is only a promise to pay the stated amount at a certain time. It does not require acceptance.
  3. IOU (I Owe You): This is an acknowledgement of a debt owed to the holder by the person who has signed it. It does not need to show the due date for payment

EVALUATION QUESTIONS

Differentiate between the following
Money Order and Postal Order
Bill of Exchange and Promissory Note
Direct Debit and Credit Transfer
Outline four essential features of a bill of exchange.

GENERAL EVALUATION/REVISION QUESTIONS

State five reasons why countries restrict foreign trade
Explain six functions of wholesalers to manufacturers
List ten facilities a good seaport should have
State five features of each of the following means of payment (a) cheque (b) postal order
Explain five factors to be considered in choosing a means of payment for the settlement of debt

READING ASSIGNMENT

Essential Commerce for SSS by O.A. Longe Page 146 – 149
Comprehensive Commerce for SSS by J.U. Anyaele Page 279 – 285

THEORY

State three factors determining the choice of means of payment.
Outline three essential features of Postal order.

We have come to the end of this class. We do hope you enjoyed the class?

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In our next class, we will be learning about Consumer Protection. We are very much eager to meet you there.

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