REVOCABLE LETTER OF CREDIT
September 12, 2022
If you’re new to the world of trading, you may feel overwhelmed by all the different terms and abbreviations. But don’t worry, you don’t need to learn the entire dictionary to understand the basics. Here’s a quick guide to some of the more common export terms you should know.
FOB, FAS, DAP, EXW, LC, BOL, Proforma, and CI are all terms you might come across in the world of trading. But what do they all mean? Let’s break it down:
FOB stands for “Free on Board.” This means that the seller pays for the transportation of the goods to the port of shipment, and the buyer pays for the transportation from there.
FAS stands for “Free Alongside Ship.” This means that the seller pays for the transportation of the goods to the port of shipment, but the buyer is responsible for the transportation from there.
DAP stands for “Delivered at Place.” This means that the seller is responsible for both the transportation of the goods to the port of destination and the delivery from there.
EXW stands for “Ex Works.” This means that the buyer is responsible for both the transportation of the goods to the port of destination and the delivery from there.
LC stands for “Letter of Credit.” This is a financial document that guarantees that the buyer will pay the seller for the goods they have purchased.
BOL stands for “Bill of Lading.” This is a document that lists the goods being shipped and serves as a receipt for the buyer.
A proforma is a type of invoice that is typically used in international trade. It is an estimate of the cost of the goods being shipped.
CI stands for “Commercial Invoice.” This is a document that lists the goods being shipped and provides an estimate of the cost.
Incoterms
Incoterms, or International Commercial Terms, are essential to know since they are legal commercial terms used to identify who (the buyer or seller) is responsible for what during the shipping process. If you choose or agree to the incorrect Incoterms in your contracts during negotiations with your overseas buyer, you may face financial consequences.
Incoterms were designed as common terms of practice and contract for international trade and are governed by the International Chamber of Commerce. Each Incoterm serves one of two purposes. The first step is to determine when responsibility and ownership of the shipment pass from the seller to the buyer. This is critical in the event that the shipment is lost or damaged in transit. The second step is to decide who is responsible for or pays for the good’s transportation, import and export processes, insurance, loading and unloading, and so on.
There are 11 incoterms, which can broadly be classified into 3 categories. Please see the detailed definitions below and seek expert assistance if necessary for your negotiations.
EXW, FCA, FAS, and FOB terms are advantageous for exporters as the buyer covers shipping costs.
CFR, CIF, CPT, and CIP terms shift the major shipping costs to the seller while the product is at the buyer’s risk. As such, the buyers should look into insurance when using these terms.
DAP, DPU, and DDP terms mean the seller pays for the shipment and all risks associated with travel. In these cases, the seller should consider insurance.
Shipping Terms
Freight Forwarders
As you can see, logistics can be complicated, but you don’t have to go it alone. The shipping industry is regulated by a number of partners, including the International Freight Forwarders Association. Visit the freight forwarders association website to learn about legitimate shipping businesses in your area.
Customs brokers
Customs brokers help ensure that importers comply with federal rules when bringing goods into the country. Brokers are private individuals, partnerships, associations, or corporations that have been licensed and regulated by the government. Customs brokers are responsible for transactions involving customs entry and acceptability of items, product categorization, customs valuation, payment of duties, taxes, or other charges, and the administration of refunds, rebates, and duty drawbacks.
You should learn the terms and conditions of the carriers you’ll be using to deliver your products. For example, if you’re exporting within the country, you’ll most likely need to use a truck, and you’ll need to know if you have a TL/FTL (trailer load or full-trailer load) or an LTL (less than a trailer load). However, if you are shipping to a foreign country, ocean carriers will ask whether the shipment is a full container load (FCL) or less than a container load (LCL).
Packing your product tightly and using a box that is too large will cost you in shipping charges by volume. To avoid these charges, ship by weight instead. In general, the price is per ton or cubic meter, but if you’re shipping less than a full load, the price is determined by weight or volume, whichever is greater.
There is a volume formula for air transport. You pay for one ton, as long as its volume does not exceed six cubic meters. After six cubic meters, you pay per volume instead. Air measurements are metric, unlike transportation measurements. You can negotiate pricing per pallet, rather than per kilogram. This option is more profitable than a price per kilogram.
Insurance
Cargo insurance is important to consider if a container falls overboard or a shipment is stolen, as carrier compensation is often minimal in these cases. Worldwide recognized provisions known as Institute Cargo Clauses A, B, or C exist to protect against these risks, and it does not matter which firm you deal with, as they all have the same clauses. A protects against all risks, while B and C are less expensive but cover less ground.
The maximum charge for air freight shipment is determined by the airline’s country; international air cargo prices can range from around $2.50 to $6.00 per kilogram, depending on the type of item being shipped and available space. However, as a result of major disruptions in ocean freight and rising consumer demand, expenses have risen sharply since February 2020. Air cargo rates currently vary from $4.50 to $9.00 per kilogram.
As ocean freight rates can vary, if you lose $100,000 USD in value, you would only be covered with $500 USD. Therefore, cargo insurance is much more critical for ocean freight.
Pro forma invoice
A proforma invoice is an invoice used to get payment from a buyer for goods or services that have not been delivered yet. It contains a description of the items, the total amount due, and other information about the transaction.
Commercial invoice
One of the most important documents in international trade and ocean freight shipment is the commercial invoice. In an international transaction, it is a legal document issued by the seller (exporter) to the buyer (importer) that serves as a contract and evidence of the sale between the buyer and seller.
Certificate of origin.
A certificate of origin is a document that validates the country of origin of a product. It is used to specify the location of the product’s production, manufacturing, or processing. When importing, it is normally required by a country’s customs department as part of the clearance procedure.
Bill of lading
A bill of lading is needed when transporting a freight shipment. The bill of lading (BOL) works as a receipt for freight services, a contract between a freight carrier and a shipper, and a title document. The bill of lading is a legally binding document that provides the driver and carrier with the information needed to process and invoice the freight shipment accurately.
Payment terms
Payment terms are the requirements that international trade parties agree on in order to finalize payment. They are sometimes referred to as payment methods that exporters and importers can use to settle trade negotiations. Payment terms cover a wide range of crucial trade-related concerns, including whether payment will be made prior to delivery, who owns the items prior to delivery, and how payment will be made.
Payment is obviously a vital aspect of achieving a profitable trade, whether you’re exporting or importing items. However, the payment conditions used can be even more important in generating good deals in the first place, especially for sellers. Buyers like to postpone payment as long as possible, preferably until they receive or sell the items. Sellers also prefer to collect payment as soon as possible, ideally before sending the products or as soon as they arrive. All of this makes determining the best payment terms a balancing act that both sides want to perfect.
The most frequently used term in global trade is a letter of credit. A letter of credit is a document issued by one bank to another (usually in another country) to ensure that payments will be made to a party (e.g., an individual or company) on time, for the correct amount, and possibly under other specified conditions. You can be confident you will receive payment after getting a letter of credit from your buyer. If you are working with a country whose financial system is unstable, the letter of credit must be confirmed by your home country’s bank.
Credit insurance
Trade credit insurance protects your company from unpaid invoices caused by client bankruptcy, default, political concerns, or other causes agreed upon with your insurer. Debtor insurance, export credit insurance, and accounts receivable insurance are all terms for trade credit insurance.
In conclusion, it is important to be familiar with export terminology, specifically payments and Incoterms, in order to avoid any legal or financial consequences. Incoterms are governed by the International Chamber of Commerce and outline who is responsible for what during the shipping process. There are many different Incoterms, so it is important to choose the right one for your contract.
