Maritime trade CIF trade terms and payment by a Letter of Credit
CIF is an acronym for Cost, Insurance and Trade, and refers to a trade term that requires the seller to make arrangements for shipment of goods by sea to a destination port, providing the buyer with all the necessary documents to get these goods from the shipper. However, any extra costs and the risk of damage remain with the buyer rather than the seller. An Irrevocable Letter of Credit; usually abbreviated as L/C, is a method of payment for international business transactions that adequately protects both the seller and the buyer.
It is simply a letter that the importer’s bank writes to the exporter, verifying that payment will be made once the bank is furnished with the necessary documents of the transaction such as freight documents and bill of lading. Once these letters have been sent by the importer, they can not be revoked (HMRC, 2009). They usually include the documents needed by the importer; which are the insurance certificate, packing list, commercial invoice and bill of lading.
They also contain the terms agreed upon by the importer and exporter, the L/C’s validity date, shipment date, destination port, loading port, amount of money, quantity and specification of goods, the negotiating bank, the opening bank, the beneficiary and the applicant, who is the importer. The importer, Panama Canal Authority, applies to open the Letter of Credit account to the seller, who is JCB, through a bank capable of opening such an account in the importer’s country. The opening bank then informs the relevant bank in Panama that the account has been opened.
The bank then informs the Panama Canal Authority, PCA, about the establishment of the Letter of Credit account. JCB will then go ahead and check the conditions and terms in the L/C to see whether they can be accepted. If these conditions and terms are accepted by JCB, they then arrange for shipment of the goods within the timeframe that the L/C specifies. After loading the ship with these goods without any damage, the ship’s captain issues the clean bill of lading to JCB. JCB then submits this bill of lading together with any other vital documents to their bank to start processing payment.
It is only with a clean bill of lading that JCB can claim to own the goods being exported (ICS, 2009). JCB’s bank then sends the clean bill of lading and all the other documents to PCA’s bank, which is the opening bank. The opening bank will then notify PCA of having received these documents once they receive them. PCA then goes to the bank and makes the necessary payments in order to receive the bill of lading as well as the other relevant documents. Armed with all these documents, PCA clears the import customs and collects the goods after arriving on the destination port.
Sales invoice A sales invoice refers to a document issued to the buyer (PCA) by the seller (JCB), and indicates the agreed prices, quantities and products of the goods supplied to the buyer. The sales invoice states that PCA must pay for these goods as per the agreed terms and conditions of payment (HKTDC, 2007). Certificate of Origin A certificate of origin refers to a document in international trade, stating the country where the goods under shipment were made, and not merely where they originate from.
In cases where not all the raw materials and processes are from one country, the country that contributes over fifty per cent of these materials or processes is accepted as the country of origin of the goods. In some cases, some countries may unite and trade as a bloc and allow certificate of origin to state the block as the origin rather than the specific countries. This certificate may either be informal; issued by the seller or official; where an official authority in the exporting country confirms it.
More often than not, the latter is preferred by many importing countries. The certificate of origin is mainly used to classify the goods in the importing country’s customs regulation, and therefore defines the amount of duty to be paid. Moreover, it is also important for statistical and import quota purposes, and may indeed be a used for health regulation where food related imports are concerned. The importer and the exporter usually clarify whether or not a Certificate of Origin is needed and agree on its content.
The certificate of origin in our case would read the United Kingdom since this is where the articulated dump truck will be exported from. Certificate of shipment A Certificate of Shipment is a document, usually issued by a carrier or forwarder, showing that a particular shipment has been sent from a particular country; this certificate only serves as evidence. For instance, the carrier may issue a certificate of shipment to show that certain goods have been sent from the UK to exclude them from VAT if they are being to countries outside the EU.
Standard Shipping Note This refers to a document enabling the shipper to complete a single benchmark document for all the shipment, irrespective of the inland depot or port. This helps in providing the receiving authority with timely, accurate and complete information. Moreover it also provides sufficient information, at each shipping stage till final loading into the vessel, to all who may have an interest in the shipment. The receiving authorities benefit from this document by receiving precise and clear information about how the consignment should be handled.
The use of the Standard Shipping Note has been very successful especially in the UK, leading to its improvement in order to incorporate the changing cargo handling practices and transport techniques, hence the introduction of NES. The general practice is for the Standard Shipping Note to accompany the deliveries; usually containerised, unit loads or general cargo, from warehouses or factories to airports, ports, or clearance depots. However, for dangerous or hazardous goods, the Standard Shipping Note is not used, and a Dangerous Goods Note is used instead (SITPRO, 2008).
Export Cargo Shipping Instruction This refers to a document an exporter issues to carrier or freight forwarder informing them what the products are, the conditions and terms of moving them and the cost of allocation. In this case, this document will be issued by JCB in the United Kingdom since that is the exporting company. Sea Waybill A Sea Waybill is a document covering the transportation of goods by sea; which only serves as evidence that the shipper has taken over the products to be transported, but is not a title document as is the case with a Bill of Lading.
It therefore serves as a receipt for the shipment and shows the details of the shipping arrangements agreed upon such as description of the goods, vessel and route. This document will be issued by JCB in our case since the goods originate from them. Export and import procedures and documents required Many countries world over have their own importing and exporting procedures, many of which are specific to them. The general ones involve the exporter offering to sell goods, stating the price, details, quantity, quality, payment terms and delivery terms, usually contained in a Quotation.
Then the exporter and the importer agree on various details concerning the transaction as stipulated in the Sales Contract (Nelson, 2000). The exporter then issues a Pro Forma Invoice before the shipment of the goods in order to inform the buyer the qualities and quantities of the goods. A packing list usually accompanies the goods to the buyer together with Inspection Certificate and Health Certificate. This is followed by a Commercial Invoice issued by the exporter to demand for payment for the goods supplied.
The payments are then made by the buyer through the concerned bank after verification of the goods supplied. Risks involved in import/export business and how to reduce them The risks involved in international trade are numerous and have been classified into various categories that include customer risks, country risks, credit risks, and foreign exchange among others. Customer risks mainly involve the creditworthiness of the customer and his or her ability to pay the bill. Country risks are further classified into five categories namely sovereign, private, natural, fashion and finance and others.
Sovereign risks are those to do with the ability or willingness of the concerned governments to pay debts, mainly affected by country’s political climate, internal and external threats, and international trade performance; such as balance of payments and amount of foreign exchange reserves (Business Link, 2009). The private sector’s ability to pay for its imports also poses a risk to international trade, a situation usually affected by the state of the country’s economy as well as the commercial institutions in that country. Natural risks mainly include climatic conditions such as earthquakes, floods, and droughts.
International trade patterns can often establish fashionable countries or regions as preferred export markets. However, these fashions could change, leading to a country losing the favour of both export and import trade. Other country risks include transfer risks like the local currency being inconvertible and non-payment or late payments. Credit risks are mainly due to extending credit facilities to customers, where the exporter must find out the creditworthiness of their customers and the amount he or she is willing to advance.
Foreign exchange risks are very common since this kind of business deals with more than one currency. This exposes the exporters and importers to foreign exchange market fluctuations. Also, a business may manufacture products to export to a particular customer, who then refuses to accept them. The businessman must therefore have a contingency plan in case such a thing happens, which could include reselling of these products or seeking a salvage value for them.
To manage these risks, the businessman must gather trade and credit information about his or her current and future customers. He or she should also research the country thoroughly and its associated risks. Moreover, the businessman should also investigate the need to take credit insurance and identify the best policy to that effect. The businessman also needs to manage credit insurance policies in order to maximise benefits. Anyone planning to engage in international business must put into consideration the financial implications as well as other implications to the business.
They include credit management strategy and senior management ownership, as well as the allocation of adequate time and resources to do the identified job (UKTI, 2009). From the Wallenius Wilhelmsen website The ship closest to the sailing date is FEDORA (Voyage ED905-FED), which departs from the Southampton Port on January 31, 2009 and arrives at the Manzanillo Port on February 14, 2009 (WW Logistics, 2009) References Business Link (2009)
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