International Trade Finance by Vinayak Joshi

International Trade Finance : An Overview

What is trade ? In its simplest form, trade is the exchange of goods or services for consideration. Goods / Services Seller

Buyer Money / Funds

Things remain simple when the buyer and seller meet each other and exchange of goods and money happens simultaneously. However, in the real world there are some complications. Let us take a look at a typical trade transaction. An American computer manufacturer - ABC signs a contract for sale of 100 computers to a buyer - XYZ in India. The various steps involved in completing the transaction from manufacturing the computers to receiving payment for them are as follows: 7 XYZ Ltd. India

ABC Inc. USA

2 6

Shipping Company

Component Suppliers

1. January 1 - ABC and XYZ sign a contract for purchase of computers 2. January 4 - ABC places orders on its suppliers to ship the required components for assembling the ordered computers. 3. January 11 - ABC receives the ordered components. 4. January 17 - The computers are assembled at ABC as per the configuration ordered by XYZ. 5. January 21 - The computers are then packaged for shipping. The required documentation for shipping is prepared and the consignment is shipped.

International Trade Finance : An Overview

6. February 21 - On arrival at the Indian Port, the computers are inspected for quality, quantity and other parameters and sent to XYZ’s warehouse. 7. March 4 - Payment is made by XYZ to ABC as per the order contract. From the above we can see that in the real world the following complications may arise:

• Instead of individuals, the buyer and seller may be organizations and may not know each other.

• The buyer and seller may not be geographically close to each other. They may be located in different countries. This means that the seller will have to transport the goods from his location to the buyer’s location.

• The above shipment may involve more than one mode of transportation (by sea, overland and/or by air).

• Exchange of goods/services against cash may not be simultaneous. Usually there is a time lag between the supply of goods/services and the receipt of payment for the same. These complexities also give rise to many risks. For example there is the risk that the goods may get damaged during transportation or the risk that the buyer may not pay the seller, after receiving the goods in his own country.

Risks in International Trade Because of its peculiarities, International Trade involves additional risks. These risks can be classified into the following categories:

• Transit Risks • Credit Risks • Currency Risks • Political & Legal Risks • Interest Rate Risks • Documentary Risks

International Trade Finance : An Overview

Transit Risk

When the buyer and the seller are not close together the merchandise has to be shipped from the seller’s location to the buyer’s. In the example presented earlier, we can see that : 1. Computers shipped overland from Houston to the seaport at Miami 2. Consignment loaded on ship and sent to JNPT, Mumbai 3. Container unloaded and shipped overland to XYZ, Bangalore

XYZ Ltd. Bangalore, India

ABC Inc., Houston, USA

1 3

Indian Port JNPT, Mumbai

Shipping Company Miami, USA

• risk of damage to or loss of goods increases because • goods have to be shipped over vast distances • through multiple modes of transport • goods are loaded and unloaded number of times

Credit Risk

We had seen in the example that ABC shipped the goods on January 21. The goods were received by XYZ on February 21 and payment was made to ABC on March 4. Since the buyer received the goods before payment, there is a risk that he may not payment at all, even after taking possession of the goods. The risk of a party not meeting/fulfilling its obligations is referred to as Credit Risk.

International Trade Finance : An Overview

Currency Risk

The currency specified for payment in a contract can have a significant effect upon the ultimate profitability of the transaction for either the buyer or seller. Fluctuations in exchange rates may cause unanticipated losses and reduce the profit margin from the transaction. This risk is referred to as Currency Risk. To illustrate, let us take another look at our example about ABC and XYZ. Suppose on January 1 at the time of signing the contract, the dollar-rupee exchange rate was Rs. 49.00 per Dollar and XYZ had agreed to pay USD 100,000 for the computers. What would be the effect on XYZ, if on the date of payment i.e. March 4, the dollar-rupee exchange rate is Rs. 51.00 per dollar?

Political Risks

Cost to XYZ as on January 1 :

Rs. 49 x USD 100,000 = Rs. 49,00,000

Cost to XYZ as on March 4 :

Rs. 51 x USD 100,000 = R s . 51,00,000

Loss to XYZ due to Exchange Rate Fluctuation

= R s . 2,00,000

The political environment in both the country of export and the country of import can have disastrous effects on international business transactions.

•

Some of the problems that political instability may cause are:

•

changes in trade policy

•

restrictions on foreign transfers

•

restrictions on the importation or exportation of certain goods

•

changes in monetary policy

•

riots or civil unrest causing loss or damage to merchandise.

Example: During the war on Iraq, a number of Indian construction companies were hurt severely and suffered losses of crores of rupees because they could not get payments for substantial projects executed in Iraq.

International Trade Finance : An Overview

Legal Risks

Legal risks can also affect an international transaction. Lack of comprehensive knowledge of legal issues can precipitate problems unimaginable in the local marketplace. Some of these are:

• unknown procedural restrictions • import regulations • exchange control restrictions Example: A shipment of encyclopedias published in the United States was detained in customs in Calcutta because a map of India showed the Line of Control as the border with Pakistan, rather than the correct map that indicates the entire Jammu & Kashmir territory as part of India.

Documentary Risks

If the required documentation is not prepared the shipment may be subject to delays at customs. This can be very damaging if the goods are perishable in nature.

Interest Rate Risks

If the terms of payment are fixed, changes in interest rates may affect the profitability of the transaction, especially if the profit margin is thin. Suppose, in our example, the prevailing domestic rate of interest is 12% p.a. ABC needs to invest USD 100,000 to produce the ordered computers. From past experience ABC knows that payment will be received after two months. Therefore, if ABC borrows USD 100,000 and pays it back after realizing the sales proceeds from XYZ, it will have to pay interest calculated as below: Interest = USD 100,000 x 12% x (2/12) = USD 2000. Keeping this is mind ABC quotes the following terms: Price with Advance Payment

: USD 100,000

Price with payment on delivery

: USD 102,000 *

* Here the interest costs are built into the price.

However, if interest costs rise to 18%, ABC has to pay USD 3,000 as interest instead of USD 2,000 and take a hit of USD 1,000.

International Trade Finance : An Overview

Key Issues in International Trade The higher risks involved in international trade require that several broad issues be resolved before entering into a trade transaction. The answers to these questions decide the ultimate shape of an international trade contract. The key concerns that need to be addressed are:

• Who bears the Credit Risk? • Who finances the transaction? • In what currency payment will be made? • Who will bear the transportation costs and risks?

Who bears the Credit Risk ?

In any transaction, the buyer would wish to make payment as late as possible, while the seller requires payment as early as possible. This happens because purchasing goods on credit allows the buyer to verify their quality, quantity and other parameters and satisfy himself about their usability before having to pay for them. The buyer does not want to end up in a situation of being stuck with defective or low-quality goods. On the other hand, the seller has invested his funds for product development, raw materials, component parts, labour, and overheads. The seller may not know the buyer or may not trust that the buyer is financially stable enough to make payment at a future date. Therefore, the seller would ideally prefer to be paid even before the shipment/delivery of goods. This creates a situation of conflict and a balance has to struck regarding the sharing of credit risk between the buyer and the seller.

Who finances the transaction ?

In an international transaction it may take from several weeks to several months for merchandise to find its way from the warehouse of the seller to the warehouse of the buyer. If we take a look at our example, we find that: 1. ABC pays for the raw materials on January 11. It also invests further funds to manufacture the computers. 2.

ABC ships the computers on January 21.

ABC receives payment on March 4.

International Trade Finance : An Overview

Mar 4 XYZ Ltd. India

Jan 21

Shipping Company

ABC Inc., USA

Jan 11

Component Suppliers

Goods must be prepared for export, trucked or sent by rail to the port, export cleared, shipped to another port, warehoused awaiting customs clearance, inspected, customs cleared, sent overland to the final destination, and finally inventoried at the buyerâ&#x20AC;&#x2122;s warehouse. All these activities take time and funds are blocked. Both the buyer and the seller desire that the other party finance the transaction and pay for the costs of financing. In reality both buyer and seller typically need to compromise somewhat in order to make the transaction happen.

In what currency would payment be made ?

As we had seen earlier, currency risks can significantly affect the ultimate profitability of the transaction for either the buyer or seller. Both the parties would wish to conclude the transaction in their local currency to avoid currency risks. From our example, we can observe that: Date of Contract January 1 (USD 1 = Rs. 49)

Date of Payment March 4 (USD 1 = Rs. 51)

When payment is in USD

Cost to XYZ = R s. 49,00,000 Revenue to ABC = USD 100,000

Cost to XYZ = R s. 51,00,000 Revenue to ABC = USD 100,000

When payment is in Rupees

Cost to XYZ = Rs. 49,00,000 Revenue to ABC = US D 100,000

Cost to XYZ = Rs. 49,00,000 Revenue to ABC = US D 96,078

When payment is in USD, ABC is protected and when payment is in Rupees, XYZ is protected from Currency Risk. Therefore, the party whose currency is used for making payment is protected from Currency Risk.

International Trade Finance : An Overview

Who will bear the transportation costs and risks ?

International trade usually involves shipment of goods over large distances. The transportation cost is an important component of the total cost. Both the cost and risk increase as goods are shipped to remote locations or transshipped or handled over and over again. Who pays for transportation and who assumes the risk if goods are damaged or lost in shipment is a major issue in international transactions. The seller feels that it is the problem of the buyer to get the goods to the buyer’s home country market. The buyer, on the other hand, doesn’t think in terms of the sale price in the country of origin, he thinks in terms of the landed cost in his own market.

To facilitate international trade despite the difficulties explained earlier, two things need to be done:

• Rules and guidelines need to be introduced that regulate the behavior of the parties involved in international trade, and

• Some credible intermediary which both buyer and seller can trust, needs to be introduced to mitigate risks. The first is achieved through standardizing and harmonizing trade practices and the documents used in international trade, and the second by introducing banks as intermediaries between buyers and sellers. In addition to reducing risks, banks also fulfill the important function of financing trade.

Role of Documentation In global trade because of the large scale and huge distances involved, it is not practical or possible to physically verify the shipment of goods and fulfillment of contracts. International trade relies heavily on documents to provide proof of shipment of goods and evidence of debt. To prevent misunderstandings due to differences in language, laws and customs etc., standardized formats of common trade documents have been developed, which are accepted worldwide. It is important for a banker to be familiar with the common documents used in international trade, to be able to accurately estimate the risks involved in financing/facilitating an international trade transaction.

International Trade Finance : An Overview

Common Trade Documents Standardized documents prevent mix-ups or misinterpretations in International Trade as all the parties are familiar with the format and contents of the documents. Standard documents minimize the errors that are likely to occur due to lack of knowledge of a foreign language, laws and customs. The documents used in international trade can be broadly classified into two categories:

â&#x20AC;˘ Financial Documents â&#x20AC;˘ Commercial Documents

Financial Documents

These are documents used to create evidence of debt. They establish the fact that the buyer owes the seller a specific amount as consideration towards goods/services supplied to him (the buyer). Examples of Financial documents are the Bill of Exchange, the invoice etc.

Bill of Exchange

A Bill of Exchange is an unconditional order, in writing, requiring a sum of money to be paid on demand or at a fixed future date. The seller (exporter) is typically the drawer of the draft, and the buyer (importer) is the drawee (except in the case of Letters of Credit, where the drawee is normally the importers bank). The Bill of Exchange is also referred to as a draft. Bills of Exchange can be classified into two categories depending upon the time of payment ordered. A Sight Bill of Exchange requires the drawee to make payment on sight/presentation/demand. Under an Usance Bill of Exchange the drawee is directed to make payment after a stated number of days or a period from a particular date or event.

Important

As per the Indian Stamp Act, Bills of exchange drawn for a tenor greater than 90 days and made payable in India attract stamp duty.

International Trade Finance : An Overview

Invoice

The invoice is a summary of the commercial transaction and gives the full description of the shipment. It includes a precise account of the goods, the address and identity of exporter and importer, and freight and insurance premiums where applicable. Payment details, destination of shipment, along with shipping marks and the number of pieces shipped may also be provided. Different types of invoices are used in different conditions. Some of these are :

Consular Invoice This is an invoice certified by the consulate of the importer’s country, situated in the exporter’s country. It is in a prescribed format and is generally required by certain countries like Philippines, South Africa and Middle Eastern nations. The purpose of a consular invoice is to verify the correctness of the type, quality and value of goods shipped. It also helps in fixing duties, avoiding delays in custom inspection and ensures that the document is adaptable for statistical purposes.

Customs Invoice

This type of invoice is generally required by countries like the USA and Canada, where the invoice is to be drawn in a specific form to be supplied by the consular office of the importer’s country. This may facilitate entry of merchandise into importer’s country at preferential tariff’s etc.

Legalised / Visaed Invoice

This is an invoice that is stamped and attested by the Consul of the importer’s country situated in the exporter’s country. The purpose is the same as Consular Invoice. However, unlike Consular Invoice, there is no prescribed format. This type of invoice is required mostly by Middle East countries.

Commercial Documents

These are documents whose purpose is to create evidence of shipment and facilitate movement of goods from the seller to the buyer.

Transport Documents

The most common transport document is the bill of lading - linking the contract of sale, the payment contracts, and the contract of carriage. The bill of lading entitles the legal holder to take physical delivery of the goods. Different types of transport documents are used depending upon the mode of transport employed to move the goods. When goods are shipped by Air the Airway Bill is used. In case of shipment over seas the Marine or Ocean

International Trade Finance : An Overview

Bills of Lading are used. In cases whre goods are shipped through multiple modes, the Multimodal Bill of lading is used. Certain types of Bills of Lading (also known as B/L in short) are also transferable or negotiable.. Marine or ocean B/Ls and multi-modal transport B/Ls are typically negotiable. Examples of a non-negotiable B/L are air or sea waybills.

Airway Bill

An Airway Bill is an acknowledgement issued by an Airline Company or their authorised agents stating that they have received the goods detailed therein for dispatch by air to the named consignee at the address stated therein. An Airway Bill is not a document of title to goods. Rather, the delivery is given on the basis of a â&#x20AC;&#x2DC;Delivery Orderâ&#x20AC;&#x2122; which is a statement from the consignor to the airlines asking to deliver the goods to a specific party. In the absence of a delivery order, airlines normally inform the named consignee and deliver the goods on proper identification.

House Airway Bill

This is a receipt of goods issued by cargo consolidators on the same lines as Airway Bill. When air cargo is shipped under consolidation, the airline company issues an Airway Bill called the Master Airway Bill to the consolidator who in turn issues his own House Airway Bill to individual shippers. Delivery of goods is taken by the agent of cargo consolidator at the station of destination and he further delivers to consignees named in the House Airway Bills.

Important

A House Airway Bill is not considered as safe a document as an Airway Bill because in case the cargo consolidator fails to pay the freight, the carriers will have the right over the goods and the holder of the House Airway Bill may not get the goods from the carrier.

Ocean or Marine This is the bill of lading issued by shipping companies moving cargo through ships over the seas. These bills of lading are transferable and Bill of Lading negotiable, hence allowing goods to be sold in transit. Generally bills of lading are issued in sets of three. The exact number of originals issued is indicated on each bill of lading. These are called negotiable bills of lading and presentation of any one of them will entitle the holder to claim the goods thereunder and render the other negotiable copies void. Different types of Bills of Lading are briefly discussed below:

International Trade Finance : An Overview

Clean Bill of Lading

A Clean Bill of lading is one which bears no super imposed clause or notation which expressly declares the defective condition of the goods or packaging. The bill of lading indicates that the carrier has received the goods in apparent good order and condition. Since the carrier acts as the bailee of the goods, he has to deliver the goods in the same good order and condition.

Claused Bill of Lading

A claused bill of lading contains superimposed clauses or reservations expressly declaring the defective nature of goods or packing. When a claused bill of lading is issued the shipowners or their agents can disown their liability to deliver the goods in good order and condition. This type of bill of lading is also called a Foul or Dirty Bill of lading.

Received for Shipment Bill of Lading

This type of Bill of lading merely acknowledges that the goods have been received by the shipowner or his agents for shipment. It is not a guarantee that the goods have been loaded onto a ship. The goods received might be stored in a warehouse and may or may not be carried by the ship named in the bill of lading.

‘On Board’ Bill of Lading

The ‘On Board’ Bill of lading acknowledges that the goods have been put on board a ship for shipment. Apart from the name of the vessel, the document should carry the notation ‘shipped on board’ or words to that effect.

Important

If a ‘Received for Shipment’ bill of lading is also inscribed with such notation with proper authorization and date, it would be considered as a Clean Bill of lading.

‘Long Form’ and ‘Short form’ Bill of Lading

In the ‘Long Form’ Bill of lading all the terms and conditions are printed on the Bill of lading itself. In the ‘Short Form’ Bill of lading such terms and conditions are not stated on the document itself, rather a reference to another document or source containing the terms and conditions is mentioned.

Through Bill of Lading

When cargo is ‘transshipped’ at an intermediate port by another vessel, the first carrier issues a ‘Through Bill of lading’ collecting the freight for the entire journey. This Bill of lading is negotiable and the cargo is released by

International Trade Finance : An Overview

the second carrier at the final port of discharge against the surrender of the ‘Through Bill of lading’ issued by the first carrier.

Straight Bill of Lading

A Bill of lading which is issued directly in the name of the consignee is called a straight bill of lading. In this case the goods will be delivered to the named consignee.

Charter Party Bill of Lading

It is a bill of lading which is issued by Charter parties i.e. those parties who have hired the space in the vessel either in full or in part. Charter Party bills of lading are issued subject to the terms and conditions agreed by the hirers of the ship space and shipowners and is not subject to the liner bill of lading terms and conditions. The Charter Party Bills of Lading are generally not acceptable because the shipowners may refuse to deliver the goods if the charterers do not pay the hire charges.

Lash Bill of Lading

This is a bill of lading issued by operators stating that the goods have been put on board a barge to be carried and put on a parent vessel. Thus this type of bill of lading is the same as a ‘Received for Shipment Bill of lading’. If the bill bears a clause indicating that the goods have been put on board the parent vessel, it becomes a regular ‘On Board Bill of lading’.

House Bill of Lading

This Bill of lading is issued by cargo consolidators who collect cargo from various shippers and give it to the shipping company in their own name. The shipping company issues only one bill of lading (called the master bill of lading) on the basis of which the cargo consolidator issues his own House Bill of Lading. The Master Bill of Lading is sent by the cargo consolidator to his agent in the port of discharge who takes delivery of the entire cargo. The consignee holding the House Bill of lading takes delivery from the agent on presentation of the document.

Important

There are two types of shipping liner services - conference and non-conference lines. A conference line is a group of two or more shipping lines which enter into an agreement to adopt the use of a common freight rate structure and a regular scheduled service on specific routes. Conference lines have regular scheduled services on pre-defined routes. contd...

International Trade Finance : An Overview (contdâ&#x20AC;Ś)

Non-conference lines are independent operators with their own rating structure and schedules. They are not contractually bound in to an conference agreement. Non-conference lines are generally less expensive than conference operators. The non-conference lines do not have the same obligations as the conference lines and are liable to change their service to suit economic conditions at the time. Because of the more risky nature of non-conference lines, banks generally do not accept bills of lading issued by them. In cases where the bank is financing the export, Clean Bills of Lading issued by Conference Lines only are acceptable.

Insurance Documents

The insurance certificate provides details of the amount and type of insurance cover obtained, the goods covered, the validity and the location for claiming the cover in the event of any loss.

Insurance Cover Note

This document is a precursor to the insurance policy. When a specific policy is required and the details of ships or shipment are not known, the insurance company issues a cover note which acts as a provisional policy to be replaced by a regular policy at a later date when the details of the shipment are provided to the insurance company. Insurance cover notes are generally valid for short periods of time, usually 3 months, within which the insurer has to supply the required shipment details and get the cover note replaced by a regular policy.

Certificate of Origin

A certificate of origin is usually issued by a local Chamber of Commerce, establishing the country where the goods are produced. This certificate is often required for exports from developing countries in order to benefit from preferential tariff treatment.

Packing List

The Packing List is a document which gives a highly detailed description and number of goods put in each packet/container etc. with distinctive numbers or marks. This facilitates easy identification of goods in each package/container by the importer or customs.

International Trade Finance : An Overview

Other Documents

Depending upon the terms of the L/C other documents may be required. Sometimes, to ensure control over the quality of the goods shipped, buyers stipulate that Certificates of Inspection/ Analysis / Weighment from an international agency be provided along with the L/C documents.

Quality/Analysis Certificate

This is a certificate which indicates the inner composition, quality technical composition and intricate nature of goods to ensure that the goods conform to the desired quality/standard/analysis. This certificate may be given by the exporter himself or an institution/organization which is competent and/ or nominated to give such a certificate.

Weighment Certificate

This is a document certifying the net and/or gross weight of the goods exported. Generally it is given by the exporter, but may at times be countersigned by an independent agency. This certificate is generally required in case of bulk goods like iron ore, food grains etc.

Inspection Certificate

An Inspection Certificate is a statement issued and signed by the appropriate authority which has inspected the goods prior to shipment. It provides evidence that the goods were inspected and details the results of such inspection. The purpose of this certificate is to ensure that the right type and quantity of goods are being shipped by the seller.

Health Certificate

When live animals or plants are exported, there may be a legal requirement in the exporterâ&#x20AC;&#x2122;s / importerâ&#x20AC;&#x2122;s country that a Certificate of Health be provided by a recognized independent agency indicating the health and transferability of the export product.

INCOTERMS - Introduction To harmonize trade practices, the International Chamber of Commerce (ICC) has produced a series of universal guidelines about the terms used in trade documents. These guidelines are meant for providing a universally understood and accepted definition of trade terms. These terms qualify and specify the responsibilities of each party in respect of delivery of goods and transfer of title. Standardized trade terms help all parties understand their roles and responsibilities in a proper manner. Through the use of these universally accepted trade terms each party is able to clearly understand the costs and the risks that it has to bear in any trade transaction.

International Trade Finance : An Overview

Background

By the 1920s, commercial traders had developed a set of trade terms to describe their rights and liabilities with regard to the sale and transport of goods. These trade terms consisted of short abbreviations for lengthy contract provisions. Unfortunately, there was no uniform interpretation of them in all countries, and therefore misunderstandings often arose in crossborder transactions. To improve this aspect of international trade, the International Chamber of Commerce (ICC) in Paris developed INCOTERMS (INternational COmmercial TERMS), a set of uniform rules for the interpretation of international commercial terms defining the costs, risks, and obligations of buyers and sellers in international transactions. First published in 1936, these rules have been periodically revised to account for changing modes of transport and document delivery. The current version is INCOTERMS 2000. INCOTERMS have been derived by the ICC to enable exporters to quote prices that clearly assign the costs and responsibilities of transporting goods to either the buyer or the seller. The key difference amongst the various terms is the point at which title/risk is transferred from seller to buyer.

Usage of INCOTERMS INCOTERMS were designed to be used within the context of a written contract for the sale of goods. INCOTERMS, therefore, refer to the contract of sale, rather than the contract of carriage of the goods. To be considered under the purview of INCOTERMS, the buyers and sellers need to specifically state that their sale contract will be governed by INCOTERMS 2000.

• The important points to remember while using INCOTERMS are: • INCOTERMS are not implied into contracts for the sale of goods. If a seller desires to use INCOTERMS, he must specifically include them in the sale contract.

• The contract should expressly refer to the rules of interpretation as defined in the latest revision of INCOTERMS, for example, INCOTERMS 2000.

• INCOTERMS are not “laws” but guidelines to interpret delivery terms.

• INCOTERMS do not apply to contracts for services. • INCOTERMS do not define contractual rights and obligations other than for delivery.

International Trade Finance : An Overview

• INCOTERMS do not specify details of the transfer, transport, and delivery of the goods. They are used To indicate each contracting party’s costs, risks, and obligations with regard to delivery of the goods.

• INCOTERMS do not determine how title to the goods will be transferred.

• INCOTERMS do not protect a party from his/her own risk of loss. • INCOTERMS do not define the remedies for breach of contract.

Important

INCOTERMS are terms of sale, rather than of carriage of goods. Nevertheless, they have a major impact on carriage of goods, because they address such questions as the passing of risk in cargo from seller to buyer; the delivery obligations of the seller, the expenses which they parties must bear in relation to the shipment (e.g. customs clearance, the payment of freight and cargo insurance arrangements).

Passing of Risk

The exact moment of the passing of risk under a contract of sale is of prime importance to the parties to a contract of carriage, because, in most cases, it determines who will suffer the consequences should loss or damage ensue. Normally risk passes from the seller to the buyer when the seller is deemed to have made delivery. INCOTERMS define the exact moment when the seller is deemed to have made delivery. For example, in FCA contracts the seller is said to have made delivery when he delivers the goods to the carrier, while in FOB contracts the seller is said to have made delivery only when the goods cross the ship’s rail and are put on board. In this case it is not sufficient to just deliver the goods to the carrier unloaded. If the goods suffer any damage while waiting to be loaded onto the ship, the loss has to be borne by the buyer in case of FCA terms and by the seller in case of FOB terms.

International Trade Finance : An Overview

Categories of INCOTERMS INCOTERMS are grouped into four categories: 1

The “E” term (EXW) : The only term where the seller makes the goods available at his or her own premises to the buyer.

The “F” terms (FCA, FAS and FOB) : Terms where the seller is responsible to deliver the goods to a carrier named by the buyer.

The “C” terms (CFR, CIF, CPT and CIP) : Terms where the seller/ manufacturer is responsible for contracting and paying for carriage of the goods, but not responsible for additional costs or risk of loss or damage to the goods once they have been shipped. C terms evidence “shipment” (as opposed to “arrival”) contracts.

The “D” terms (DAF, DES, DEQ, DDU and DDP) : Terms where the seller/manufacturer is responsible for all costs and risks associated with bringing the goods to the place of destination. D terms evidence “arrival” contracts.

INCOTERMS in Detail EXW

Ex Works (...named place) In Ex Works, the seller/exporter/manufacturer merely makes the goods available to the buyer at the seller’s “named place” of business. This trade term places the greatest responsibility on the buyer and minimum obligations on the seller. The seller does not clear the goods for export and does not load the goods onto a truck or other transport vehicle at the named place of departure. The parties to the transaction, however, may stipulate that the seller be responsible for the costs and risks of loading the goods onto a transport vehicle. Such a stipulation must be made within the contract of sale. Examples EXW Ex Works ABC Factory Paris, France EXW Ex Works XYZ Printing Plant Singapore

FCA

Free Carrier (...named place) In Free Carrier, the seller clears the goods for export and then delivers them to the carrier specified by the buyer at the named place. If the named place is the seller’s place of business, the seller is responsible for loading the goods onto the transport vehicle. If the named place is any

International Trade Finance : An Overview

other location, such as the loading dock of the carrier, the seller is not responsible for loading the goods onto the transport vehicle. The “named place” in Free Carrier and all “F” terms is domestic to the seller. A carrier can be a shipping line, an airline, a trucking firm, or a railway. The carrier can also be an individual or firm who undertakes to procure carriage by any of the above methods of transport including multimodal. Therefore, a person, such as a freight forwarder, can act as a “carrier” under this term. In such a case, the buyer names the carrier or the individual who is to receive the goods. Examples FCA Free Carrier ABC Shipping Lines Hamburg Germany FCA Free Carrier AZ Freight Forwarders Tokyo Japan

FAS

Free Alongside Ship (...named port of shipment) In Free Alongside Ship, the seller/exporter/manufacturer delivers the goods, non-export cleared, alongside a ship, and does not bear risk or costs once the goods have been handed over. The Free Alongside Ship term is commonly used in the sale of bulk commodity cargo such as oil, grains, and ore. Normal payment terms for Free Carrier transactions are generally cash in advance and open account, but letters of credit are also used. Examples FAS Free Alongside Ship Port Elizabeth, South Africa

FOB

Free On Board (...named port of shipment) In Free On Board, the seller/exporter/manufacturer clears the goods for export and is responsible for the costs and risks of delivering the goods past the ship’s rail at the named port of shipment. The “named place” in Free On Board and all “F” terms is domestic to the seller. The Free On Board term is commonly used in the sale of bulk commodity cargo such as oil, grains, and ore where passing the ship’s rail is important.

International Trade Finance : An Overview

Examples FOB Free on Board “Vessel ABC” Buenos Aires Argentina FOB Free on Board Gdansk Poland

CFR

Cost and Freight (...named port of destination) In Cost and Freight, the seller/exporter/manufacturer clears the goods for export and is responsible for delivering the goods past the ship’s rail at the port of shipment (not destination). The seller is also responsible for paying for the costs associated with transport of the goods to the named port of destination. However, once the goods pass the ship’s rail at the port of shipment, the buyer assumes responsibility for risk of loss or damage as well as any additional transport costs. The “named port of destination” in Cost and Freight and all “C” terms is domestic to the buyer. Examples CFR Cost and Freight Port-au-Prince Haiti CFR Cost and Freight Bombay India

CIF

Cost, Insurance and Freight (...named port of destination) In Cost, Insurance and Freight, the seller/exporter/manufacturer clears the goods for export and is responsible for delivering the goods past the ship’s rail at the port of shipment (not destination). The seller is responsible for paying for the costs associated with transport of the goods to the named port of destination. However, once the goods pass the ship’s rail at the port of shipment, the buyer assumes responsibility for risk of loss or damage as well as any additional transport costs. The seller is also responsible for procuring and paying for marine insurance in the buyer’s name for the shipment. The “named port of destination” in Cost and Freight and all “C” terms is domestic to the buyer. Examples CIF Cost Insurance and Freight Hong Kong CIF Cost, Insurance and Freight Port of New York

International Trade Finance : An Overview

CPT

Carriage Paid To (...named port of destination) In Carriage Paid To, the seller/exporter/manufacturer clears the goods for export, delivers them to the carrier, and is responsible for paying for carriage to the named port of destination. However, once the seller delivers the goods to the carrier, the buyer becomes responsible for all additional costs. In INCOTERMS 2000 the seller is also responsible for the costs of unloading, customs clearance, duties, and other costs if such costs are included in the cost of carriage such as in small package courier delivery. The seller is not responsible for procuring and paying for insurance cover. The “named port of destination” in CPT and all “C” terms is domestic to the buyer, but is not necessarily the final delivery point. A “carrier” can be a shipping line, airline, trucking firm, railway or also an individual or firm who undertakes to procure carriage by any of the above methods of transport including multimodal. Therefore, a person, such as a freight forwarder, can act as a “carrier” under this term. If subsequent carriers are used for the carriage to the agreed destination, the risk passes when the goods have been delivered to the first carrier.

CIP

Carriage and Insurance Paid To (...named port of destination) In Carriage and Insurance Paid To, the seller/exporter clears the goods for export, delivers them to the carrier, and is responsible for paying for carriage and insurance to the named port of destination. However, once the goods are delivered to the carrier, the buyer is responsible for all additional costs. In Incoterms 2000 the seller is also responsible for the costs of unloading, customs clearance, duties, and other costs if such costs are included in the cost of carriage such as in small package courier delivery. The seller is responsible for procuring and paying for insurance cover. The “named port of destination” in CIP and all “C” terms is domestic to the buyer, but is not necessarily the final delivery point. A “carrier” can be a shipping line, airline, trucking firm, railway or also an individual or firm who undertakes to procure carriage by any of the above methods of transport including multimodal. Therefore, a person, such as a freight forwarder, can act as a “carrier” under this term.

International Trade Finance : An Overview

If subsequent carriers are used for the carriage to the agreed destination, the risk passes when the goods have been delivered to the first carrier.

DAF

Delivered at Frontier (...name place) In Delivered At Frontier, the seller/exporter/manufacturer clears the goods for export and is responsible for making them available to the buyer at the named point and place at the frontier, not unloaded, and not cleared for import. In the DAF term, naming the precise point, place, and time of availability at the frontier is very important as the buyer must make arrangements to unload and secure the goods in a timely manner. Frontier can mean any frontier including the frontier of export. The DAF term is valid for any mode of shipment, so long as the final shipment to the named place at the frontier is by land. The seller is not responsible for procuring and paying for insurance cover. Example DAF Laredo, Texas. Seller is in Dallas, Texas, buyer is in Mexico City, Mexico. The shipment travels by truck from Dallas to the frontier at Laredo, Texas USA where the buyer takes possession and trucks the goods to Mexico City.

DES

Delivered Ex Ship (...named port of destination) In Delivered Ex Ship, the seller/exporter/manufacturer clears the goods for export and is responsible for making them available to the buyer on board the ship at the named port of destination, not cleared for import. The seller is thus responsible for all costs of getting the goods to the named port of destination prior to unloading. Examples DES Delivered Ex Ship Port of Calcutta DES Delivered Ex Ship Port of New York

International Trade Finance : An Overview

DEQ

Delivered Ex Quay (...named port of destination) In Delivered Ex Quay, the seller/exporter/manufacturer clears the goods for export and is responsible for making them available to the buyer on the quay (warf) at the named port of destination, not cleared for import. The buyer, therefore, assumes all responsibilities for import clearance, duties, and other costs upon import as well as transport to the final destination. This is new for Incoterms 2000. Examples DEQ Delivered Ex Quay Alexandria Egypt DEQ Delivered Ex Quay Stockholm Sweden

DDU

Delivered Duty Unpaid (...named place of destination) In Delivered Duty Unpaid, the seller/exporter/manufacturer clears the goods for export and is responsible for making them available to the buyer at the named place of destination, not cleared for import. The seller, therefore, assumes all responsibilities for delivering the goods to the named place of destination, but the buyer assumes all responsibility for import clearance, duties, administrative costs, and any other costs upon import as well as transport to the final destination. The DDU term can be used for any mode of transport. However, if the seller and buyer desire that delivery should take place on board a sea vessel or on a quay (wharf), the DES or DEQ terms are recommended. The DDU term is used when the named place of destination (point of delivery) is other than the seaport or airport. Examples DDU Delivered Duty Unpaid New York New York USA DDU Delivered Duty Unpaid Hamburg Germany

DDP

Delivered Duty Paid (...named place of destination) In Delivered Duty Paid, the seller/exporter/manufacturer clears the goods for export and is responsible for making them available to the buyer at the named place of destination, cleared for import, but not unloaded from the transport vehicle.

International Trade Finance : An Overview

The seller, therefore, assumes all responsibilities for delivering the goods to the named place of destination, including all responsibility for import clearance, duties, and other costs payable upon import. The DDP term is used when the named place of destination (point of delivery) is other than the seaport or airport. Examples DDP Delivered Duty Paid Chicago USA DDP Delivered Duty Paid VAT Unpaid Paris France

Note:

The responsibilities of the Buyer and Seller under the three most commonly used terms â&#x20AC;&#x201C; FOB, CFR and CIF are discussed in greater detail in Appendix 1.

Summary Trade is exchange of goods/services for specific consideration. International trade is more riskier and complex than domestic trade due to larger distances, lack of knowledge about the counterparty, differences in customs and laws of different countries, fluctuations in exchange rates etc. The issue of managing the additional risks is of great importance in international trade. The manner in which the various risks like transit risk, credit risk, currency risks etc. are addressed, materially affects the way trade transactions are done. Documents are used as the primary proof of performance of obligations in any international trade contract. Uniform standardized documents are used in International Trade to minimize misunderstanding and misinterpretation. Financial documents like the Bill of Exchange and Commercial Invoice provide evidence of debt, while Commercial documents like Bill of Lading, Insurance Certificate, Packing List etc. provide proof of shipment. INCOTERMS have been developed as universally understood and accepted guidelines for qualifying and specifying delivery terms by the ICC. INCOTERMS define the rights and responsibilities of each party regarding delivery of goods. They specify the risks and costs of both the buyer and the seller. INCOTERMS are not laws and are applicable only if both the buyer and the seller agree for the same. INCOTERMS have been classified into four groups â&#x20AC;&#x201C; E, F, C and D.

International Trade Finance : An Overview

Review Questions 1

What is transit risk ? Is it greater in Domestic Trade or International Trade ? Give reasons for your answer.

What is Currency Risk ? In a trade transaction between a buyer in Germany and a seller in India, if the payment is to be made in Rupees, which party is exposed to Currency Risk?

The party which finances the trade transaction is protected from most of the risks like Credit Risk, Transit Risk and Interest Rate Risk. Is the previous statement correct ? Support your answer with examples.

In what way does documentation aid in reducing risk / uncertainty in International Trade ?

What are Financial Documents ? What is the main purpose served by financial documents ?

What are Commercial Documents ? What is the main purpose served by commercial documents ?

Why were INCOTERMS developed ?

What are the different groups into which INCOTERMS can be clubbed ? What is the main characteristic of each group ?

International Trade Finance : An Overview

Appendix 1 This appendix discusses the roles and responsibilities of the buyer and seller in the three most commonly used INCOTERMS – FOB (Free on Board), CFR (Cost and Freight) and CIF (Cost, Insurance and Freight)

FOB

FOB is an “F” Incoterm where the seller/exporter is responsible for delivering the goods, export cleared, on board a ship, and does not bear risk or costs afterwards. Modes of Transport Covered : Used only for ocean or inland waterway transport.

Se lle r ' s R e s p o n s ib ilit ie s

B u y e r ' s R e s p o n s ib ilit ie s

Go o d s

Provi de t he goods , comme rci al i nvoi ce and ot he r docume nt at i on as re qui re d by t he s al e s cont ract .

Pay for t he goods as provi de d i n t he s al e s cont ract .

L ic e n s e s a n d C u s t o ms F o r ma lit ie s

Obt ai n at own ri s k and cos t any e xport l i ce ns e s and aut hori z at i ons and carry out al l e xport formal i t i e s and proce dure s .

Obt ai n at own ri s k and cos t any i mport l i ce ns e s and aut hori z at i ons and carry out al l i mport formal i t i e s .

C a r r ia g e a n d I n su r a n ce

The s e l l e r has no obl i gat i on t o t he buye r t o provi de carri age of goods or i ns urance .

Provi de for cont ract of carri age from t he name d port of s hi pme nt . No obl i gat i on for i ns urance .

D e liv e r y

De l i ve r t he goods on board t he name d ve s s e l at t he name d port and pl ace and at t he t i me s t i pul at e d i n t he s al e s cont ract .

Take de l i ve ry of t he goods as provi de d i n t he s al e s cont ract .

R is k T r a n s f e r

As s ume al l ri s ks of l os s or damage t o t he goods unt i l t he y have pas s e d t he s hi p's rai l on t he name d ve s s e l as provi de d i n t he s al e s cont ract .

As s ume al l ri s ks of l os s or damage from t he t i me t he goods have pas s e d t he s hi p's rai l at t he port of s hi pme nt .

Co sts

Pay al l cos t s unt i l t he goods have pas s e d t he s hi p's rai l on t he name d ve s s e l as we l l as al l cos t s re l at i ng t o e xport i ncl udi ng dut i e s , t axe s and cus t oms formal i t i e s .

Pay al l cos t s for carri age and i ns urance from t he t i me t he goods have pas s e d t he s hi p's rai l at t he port of s hi pme nt i n accordance wi t h t he t e rms of t he s al e s cont ract . Pay al l cos t s re s ul t i ng from fai l ure of t he name d s hi p t o arri ve on t i me or t o be abl e t o t ake t he goods . Pay al l cos t s re l at i ng t o i mport formal i t i e s i ncl udi ng dut i e s , t axe s and ot he r charge s i ncl udi ng t rans s hi pme nt .

International Trade Finance : An Overview

Se lle r ' s R e s p o n s ib ilit ie s

B u y e r ' s R e s p o n s ib ilit ie s

N o t ic e

Provi de s uffi ci e nt not i ce t o t he buyer t hat t he goods have be e n de l i ve re d on board t he name d ve s s e l .

Gi ve s uffi ci e nt not i ce t o t he s e l l e r of t he name of t he ve s s e l , t he t i me or pe ri od for de l i ve ry and t he pl ace of de l i ve ry.

P roof of D e liv e r y , T r a n sp o r t D o c u me n t s

Provi de t he buye r wi t h a proof of de l i ve ry or a t rans port docume nt , or t o as s i s t t he buye r i n obt ai ni ng a t rans port docume nt .

Acce pt t he s e l l e r's proof of de l i ve ry or t rans port docume nt .

C h e c k in g , P a c k in g , M a r k in g

Pay al l cos t s as s oci at e d wi t h che cki ng t he qual i t y and quant i t y of t he goods t o be i n conformi t y wi t h t he s al e s cont ract . Provi de appropri at e packi ng (unl e s s t he goods are t radi t i onal l y de l i ve re d unpackage d) as re qui re d for t he t rans port of t he goods , t o t he e xt e nt t hat t he buye r has made t rans port ci rcums t ance s known t o t he s e l l e r pri or t o t he e xe cut i on of t he s al e s cont ract . Provi de marki ng appropri at e t o t he packagi ng.

Pay for t he cos t s of pre -s hi pme nt i ns pe ct i on e xce pt i ns pe ct i ons re qui re d by t he count ry of e xport .

O the r

Provi de t he buye r at t he buye r's re que s t , ri s k and e xpe ns e any and al l as s i s t ance i n s e curi ng docume nt at i on ori gi nat i ng i n t he count ry of e xport or of ori gi n re qui re d for i mport and t rans s hi pme nt t hrough anot he r count ry. Provi de t he buye r at t he buye r's re que s t i nformat i on ne ce s s ary t o obt ai n i ns urance .

Pay al l cos t s as s oci at e d wi t h s e curi ng docume nt at i on ori gi nat i ng i n t he count ry of ori gi n or e xport as re qui re d for i mport . Re i mburs e s e l l e r for s e l l e r's cos t s i n provi di ng s uch docume nt at i on or as s i s t ance .

International Trade Finance : An Overview

CFR is a “C” Incoterm where the seller is responsible for contracting and paying for carriage of the goods, but not responsible for additional costs or risk of loss or damage to the goods once they have been shipped. C terms evidence “shipment” (as opposed to “arrival”) contracts. Modes of Transport Covered : Used only for ocean or inland waterway transport. Se lle r ' s R e s p o n s ib ilit ie s

B u y e r ' s R e s p o n s ib ilit ie s

Go o d s

Provi de t he goods , comme rci al i nvoi ce and ot he r docume nt at i on as re qui re d by t he s al e s cont ract .

Pay for t he goods as provi de d i n t he s al e s cont ract .

L ic e n s e s a n d C u s t o ms F o r ma lit ie s

Obt ai n at own ri s k and cos t any e xport l i ce ns e s and aut hori z at i ons and carry out al l e xport formal i t i e s and proce dure s .

Obt ai n and pay cos t s of al l i mport l i ce ns e s and aut hori z at i ons and carry out al l i mport formal i t i e s .

C a r r ia g e a n d I n su r a n ce

Cont ract for and pay al l cos t s of carri age by s e a ve s s e l t o t he name d port of de s t i nat i on. No obl i gat i on t o provi de i ns urance .

No obl i gat i on t o t he s e l l e r.

D e liv e r y

De l i ve r t he goods on board t he name d ve s s e l at t he name d port and on t he dat e or wi t hi n t he t i me pe ri od s t i pul at e d i n t he s al e s cont ract .

Take de l i ve ry of t he goods at t he port of de s t i nat i on as provi de d i n t he s al e s cont ract .

R is k T r a n s f e r

As s ume al l ri s ks of l os s or damage t o t he goods unt i l t he y have pas s e d ove r t he s hi p's rai l at t he port of s hi pme nt .

As s ume al l ri s k of l os s or damage from t he t i me t he goods have pas s e d ove r t he s hi p's rai l at t he port of s hi pme nt .

Co sts

Pay al l cos t s unt i l t he goods have be en de l i ve re d t o t he name d port of s hi pme nt and pas s e d ove r t he s hi p's rai l pl us cos t s of l oadi ng, carri age t o t he port of de s t i nat i on and normal unl oadi ng. Al s o t o pay al l cos t s re l at i ng t o e xport i ncl udi ng dut i e s , t axe s and cus t oms formal i t i e s .

Pay al l addi t i onal cos t s for t he goods once t he y have pas s e d ove r t he s hi p's rai l at t he port of s hi pme nt , i ncl udi ng unl oadi ng, l i ght e rage and wharfage at t he port of de s t i nat i on. Pay al l cos t s re l at i ng t o i mport formal i t i e s i ncl udi ng dut i e s , t axe s and ot he r charge s i ncl udi ng t rans s hi pme nt .

International Trade Finance : An Overview

Se lle r ' s R e s p o n s ib ilit ie s

B u y e r ' s R e s p o n s ib ilit ie s

N o t ic e

Provi de s uffi ci ent not i ce t o t he buyer t hat t he goods have been del i vered on board t he named ves s el .

If, accordi ng t o t he s al es cont ract , t he buyer i s abl e t o s peci fy a t i me for s hi ppi ng and/or s peci fy a port of des t i nat i on, t o gi ve t he s el l er s uffi ci ent not i ce.

P roof of D e liv e r y , T r a n sp o r t D o c u me n t s

Provi de t he buyer wi t h a t rans port document t hat wi l l al l ow t he buyer t o cl ai m t he goods at t he des t i nat i on and (unl es s ot herwi s e agreed) al l ow t he buyer t o s el l t he goods whi l e i n t rans i t t hrough t he t rans fer of t he t rans port document or by not i fi cat i on t o t he s ea carri er.

Accept t he s el l er's t rans port document s o l ong as i t i s i n conformi t y wi t h t he s al es cont ract .

C h e c k in g , P a c k in g , M a r k in g

Pay al l cos t s as s oci at ed wi t h checki ng t he qual i t y and quant i t y of t he goods t o be i n conformi t y wi t h t he s al es cont ract . Provi de appropri at e packi ng (unl es s t he goods are t radi t i onal l y del i vered unpackaged) as requi red for t he t rans port of t he goods , t o t he ext ent t hat t he buyer has made t rans port ci rcums t ances known t o t he s el l er pri or t o t he execut i on of t he s al es cont ract . Provi de marki ng appropri at e t o t he packagi ng.

Pay for t he cos t s of pre-s hi pment i ns pect i on except i ns pect i ons requi red by t he count ry of export .

O the r

Provi de t he buyer at t he buyer's reques t , ri s k and expens e any and al l as s i s t ance i n s ecuri ng document at i on ori gi nat i ng i n t he count ry of export or of ori gi n requi red for i mport and t rans s hi pment (as neces s ary). Provi de t he buyer at t he buyer's reques t i nformat i on neces s ary t o obt ai n i ns urance.

Pay al l cos t s of s ecuri ng document at i on from t he count ry of ori gi n or export as requi red for i mport . Rei mburs e s el l er for cos t s i n provi di ng s uch document at i on or as s i s t ance.

International Trade Finance : An Overview

CIF is a “C” Incoterm where the seller is responsible for contracting and paying for carriage and insurance of the goods, but not responsible for additional costs or risk of loss or damage to the goods once they have been shipped. C terms evidence “shipment” (as opposed to “arrival”) contracts. Modes of Transport Covered Used only for ocean or inland waterway transport.

Se lle r ' s R e s p o n s ib ilit ie s

B u y e r ' s R e s p o n s ib ilit ie s

Go o d s

Provi de t he goods , comme rci al i nvoi ce and ot he r docume nt at i on as re qui re d by t he s al e s cont ract .

Pay for t he goods as provi de d i n t he s al e s cont ract .

L ic e n s e s a n d C u s t o ms F o r ma lit ie s

Obt ai n at own ri s k and cos t any e xport l i ce ns e s and aut hori z at i ons and carry out al l e xport formal i t i e s and proce dure s .

Obt ai n and pay cos t s of al l i mport l i ce ns e s and aut hori z at i ons and carry out al l i mport formal i t i e s .

C a r r ia g e a n d I n su r a n ce

Cont ract for and pay cos t s of carri age by s e a or i nl and wat e rway and i ns urance for 110 pe rce nt of t he val ue of t he cont ract t o t he name d port of de s t i nat i on. The i ns urance pol i cy mus t al l ow t he buye r t o make cl ai m di re ct l y from t he i ns ure r. De l i ve r t he i ns urance docume nt t o t he buye r.

No obl i gat i on t o t he s e l l e r t o pay for carri age or i ns urance .

D e liv e r y

De l i ve r t he goods on board t he name d ve s s e l at t he name d port and at t he dat e or wi t hi n t he t i me pe ri od s t i pul at e d i n t he s al e s cont ract .

Take de l i ve ry of t he goods at t he port of de s t i nat i on as provi de d i n t he s al e s cont ract .

R is k T r a n s f e r

As s ume al l ri s ks of l os s or damage t o t he goods unt i l t he y have pas s e d ove r t he s hi p's rai l at t he port of s hi pme nt .

As s ume al l ri s k of l os s or damage from t he t i me t he goods have pas s e d ove r t he s hi p's rai l at t he port of s hi pme nt .

Co sts

Pay al l cos t s of carri age and i ns urance unt i l t he goods have be e n de l i ve re d t o t he name d port of s hi pme nt and pas s e d ove r t he s hi p's rai l , pl us cos t s of l oadi ng, carri age t o t he port of de s t i nat i on and normal unl oadi ng. Al s o t o pay al l cos t s re l at i ng t o e xport i ncl udi ng dut i e s , t axe s and cus t oms formal i t i e s .

Pay al l s uppl e me nt al cos t s for t he goods once t he y have pas s e d ove r t he s hi p's rai l at t he port of s hi pme nt , i ncl udi ng unl oadi ng, l i ght e rage and wharfage at t he port of de s t i nat i on. Pay al l cos t s re l at i ng t o i mport formal i t i e s i ncl udi ng dut i e s , t axe s and ot he r charge s i ncl udi ng t rans s hi pme nt .

International Trade Finance : An Overview

Se lle r ' s R e s p o n s ib ilit ie s

B u y e r ' s R e s p o n s ib ilit ie s

N o t ic e

Provi de s uffi ci ent not i ce t o t he buyer t hat t he goods have been del i vered on board t he named ves s el .

If, accordi ng t o t he s al es cont ract , t he buyer i s abl e t o s peci fy a t i me for s hi ppi ng and/or s peci fy a port of des t i nat i on, t o gi ve t he s el l er s uffi ci ent not i ce.

P roof of D e liv e r y , T r a n sp o r t D o c u me n t s

Accept t he s el l er's t rans port document s o l ong as i t i s i n conformi t y wi t h t he s al es cont ract .

C h e c k in g , P a c k in g , M a r k in g

Pay al l cos t s as s oci at ed wi t h checki ng t he qual i t y and quant i t y of t he goods t o be i n conformi t y wi t h t he s al es cont ract . Provi de appropri at e packi ng (unl es s t he goods are t radi t i onal l y del i vered unpackaged) as requi red for t he t rans port of t he goods , t o t he ext ent t hat t he buyer has made t rans port ci rcums t ances known t o t he s el l er pri or t o t he execut i on of t he s al es cont ract . Provi de marki ng appropri at e t o t he packagi ng.

Pay for t he cos t s of pre-s hi pment i ns pect i on except i ns pect i ons requi red by t he count ry of export .

O the r

Provi de t he buyer at t he buyer's reques t , ri s k and cos t any and al l as s i s t ance i n s ecuri ng document at i on ori gi nat i ng i n t he count ry of export or of ori gi n requi red for i mport and for t rans s hi pment .

Pay cos t s of s ecuri ng document at i on from t he count ry of ori gi n or export as requi red for i mport . Rei mburs e s el l er s uch cos t s . Provi de i nformat i on neces s ary t o obt ai n i ns urance.

Notes

Document Summary and Introduction 1. Edit History Ver s io n

Da te

A utho r

A c tio n

1.0

18.02.2003

Applect

Released first v ersion.

2. Reference Documents R e f. N o .

Do c um ent Title

A utho r

I01

Multinational Financial Management, 4th Ed, Prentice Hall of India

Alan C. Shapiro

I02

INCOTERMS

ICC Publication

I03

Trade Payments under Documentary Credits and Collections, Academy of Business Studies

G. D. Aw asthi

Glossary Transit Risk

The risk of damage or loss of goods while in transit.

Credit Risk

The risk of the buyer not paying for goods/services as per the contract.

Political & Legal Risks

The risks arising from unstable political environment in and/or lack of knowledge about laws of a country.

Currency Risks

The risks arising from fluctuations in the exchange rate of a currency.

Documentary Risks

The risk of delay/non-execution of contracts due to lack of proper documentation.

Export

The sale of goods/services abroad (outside the seller’s country)

Import

The purchase of goods/services from abroad (outside the buyer’s country)

Bill of Exchange

An unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the addressee to pay a fixed sum of money on demand or at a fixed or determinable point of time in future to, or to the order of a specified person or the bearer.

Bill of Lading

A receipt for goods received for carriage to a stated destination, signed by the master of a ship. The bill is also a negotiable document of title to the goods, transferable by endorsement.

Certificate of Origin

A document that confirms that the goods have been made or manufactured in a stated country.

Commercial Invoice

A commercial document which describes the goods, unit and/or total price, shipping terms, buyer’s and seller’s references etc.

Packing List

A list of goods dispatched along with details like price, quantity, delivery and payment terms.

ICC

International Chambers of Commerce, Paris

INCOTERMS

INternational COmmercial Terms

International Trade Finance : An Overview

Contents What is trade ? ..................................................................................... 1 Risks in International Trade ..................................................................... 2 Transit Risk ............................................................................................ Credit Risk............................................................................................. Currency Risk ......................................................................................... Political Risks ......................................................................................... Legal Risks ............................................................................................. Documentary Risks ................................................................................... Interest Rate Risks ...................................................................................

3 3 4 4 5 5 5

Key Issues in International Trade ............................................................... 6 Who finances the transaction ? ..................................................................... Who bears the Credit Risk ? ......................................................................... In what currency would payment be made ? ...................................................... Who will bear the transportation costs and risks ? ...............................................

6 6 7 8

Role of Documentation ........................................................................... 8 Common Trade Documents ...................................................................... 9 Financial Documents ................................................................................. 9 Bill of Exchange ...................................................................................... 9 Invoice ................................................................................................ 10 Consular Invoice ..................................................................................... 10 Customs Invoice ..................................................................................... 10 Legalised / Visaed Invoice ......................................................................... 10 Commercial Documents ............................................................................. 10 Transport Documents ............................................................................... 10 Airway Bill ............................................................................................ 11 House Airway Bill .................................................................................... 11 Ocean or Marine Bill of Lading ..................................................................... 11 ‘On Board’ Bill of Lading ........................................................................... 12 ‘Long Form’ and ‘Short form’ Bill of Lading ..................................................... 12 Through Bill of Lading .............................................................................. 12 Clean Bill of Lading ................................................................................. 12 Claused Bill of Lading ............................................................................... 12 Received for Shipment Bill of Lading ............................................................. 12 Straight Bill of Lading ............................................................................... 13 Charter Party Bill of Lading ........................................................................ 13 Lash Bill of Lading ................................................................................... 13

International Trade Finance : An Overview

House Bill of Lading ................................................................................. 13 Packing List .......................................................................................... 14 Insurance Documents ............................................................................... 14 Insurance Cover Note ............................................................................... 14 Certificate of Origin ................................................................................ 14 Other Documents .................................................................................... 15 Quality/Analysis Certificate ........................................................................ 15 Weighment Certificate ............................................................................. 15 Inspection Certificate .............................................................................. 15 Health Certificate ................................................................................... 15

INCOTERMS - Introduction ...................................................................... 15 Background .......................................................................................... 16

Usage of INCOTERMS ............................................................................. 16 Passing of Risk ....................................................................................... 17

Categories of INCOTERMS ....................................................................... 18 INCOTERMS in Detail ............................................................................. 18 EXW ................................................................................................... 18 FCA .................................................................................................... 18 FAS .................................................................................................... 19 FOB .................................................................................................... 19 CFR .................................................................................................... 20 CIF ..................................................................................................... 20 CPT .................................................................................................... 21 CIP .................................................................................................... 21 DAF .................................................................................................... 22 DES .................................................................................................... 22 DEQ ................................................................................................... 23 DDU ................................................................................................... 23 DDP.................................................................................................... 23

Summary ........................................................................................... 24 Review Questions ................................................................................. 25 Appendix 1 ......................................................................................... 26