Export Marketing

SUBMITTED TO ASSIGNMENT ON SUBMITTED BY

Prof. Zia-Ur-Rehman Delivery Terms and Letter of

Credit, export financing
BADAR NOOR (001)

MBA morning (4th semester)

INSTITUTE OF BUSINESS ADMINISTRATION UNIVERSITY OF THE PUNJAB

Delivery terms
Contracts involving international transportation often contain abbreviated trade terms that outline matters such as the time and place of delivery and payment, the time when the risk of loss shifts from the seller to the buyer, and the party who pays the costs of freight and insurance. The most commonly known trade terms are Incoterms, which are published by the International Chamber of Commerce. These are often identical in form to domestic terms, such as the American Uniform Commercial Code, but have different meanings. As a result, parties to a contract must expressly indicate the governing law of their terms. These are legal terms, their exact definitions are complicated and differ by country. It is suggested that you contact an international trade lawyer before using any trade term.

Ex Works EXW
A trade term requiring the seller to deliver goods at his or her own place of business. All other transportation costs and risks are assumed by the buyer.

Free Carrier - FCA

A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. Costs for transportation and risk of loss transfer to the buyer after delivery to the carrier. When used in trade terms, the word "free" means the seller has an obligation to deliver goods to a named place for transfer to a carrier

Free Alongside - FAS

A trade term requiring the seller to deliver goods to a named port alongside a vessel designated by the buyer. "Alongside" means that the goods are within reach of a ship's lifting tackle.

Free On Board - FOB

A trade term requiring the seller to deliver goods on board a vessel designated by the buyer. The seller fulfills its obligations to deliver when the goods have passed over the ship's

Cost and Freight - CFR

A trade term requiring the seller to arrange for the carriage of goods by sea to a port of destination, and provide the buyer with the documents necessary to obtain the goods from the carrier. Under CFR, the seller does not have to

procure marine insurance against the risk of loss or damage to the goods during transit.

Cost, Insurance and Freight - CIF

A trade term requiring the seller to arrange for the carriage of goods by sea to a port of destination, and provide the buyer with the documents necessary to obtain the goods from the carrier.

Carrier Paid To - CPT

In international commerce, an agreement between a seller and a buyer indicating that the seller is responsible for the costs of shipping a good while the buyer assumes the risk of damage to the good once it is transferred to a carrier. This means that the buyer is responsible for any insurance he/she may wish to purchase. A carrier is any person who transports the good to an agreed upon destination; in cases where the transportation involves multiple carriers, risk is transferred when the good is delivered to the fist carrier

Carriage and Insurance Paid To - CIP

In international commerce, an agreement between a buyer and a seller stating that the seller is responsible for paying for shipping and providing a minimum amount of insurance coverage until some named destination, while the buyer is responsible for the transportation risk beyond the minimum coverage as soon as the good or product is delivered to the carrier. It is also called a CIP.

Delivered at Frontier
In international trade, an agreement between a buyer (importer) and a seller (exporter) in which the seller assumes all expense and risk of delivering a good up to the borders of the buyer's country. At that point, the buyer assumes all expense and risk. This term is most common when the good is delivered over land. It is less common in maritime or air transportation.

Delivered Ex Ship (DES)

Seller fulfills the contract obligations when the goods have been made available to the buyer on board a ship at the named port of destination. The seller must bear all costs and risks associated in bringing the goods to the named port of destination. The buyer is responsible for all costs necessary to unload the goods and clear them through customs. Unloading costs are included the ocean freight charged by most ship lines. The DES is most often used for charter shipments.

Delivered Ex Quay - DEQ

In international trade, a contract specification where the seller must deliver the goods to the wharf at the destination port. Delivered ex quay may be noted as having duty paid or unpaid. If it is marked as paid, the seller is responsible for any costs, such as duty, and risks associated with the delivery. The buyer must pay the costs and duty when the DEQ is marked as "duty unpaid

Delivered Duty Paid - DDP

A transaction in which the seller must pay for all of the costs related to transporting the goods and is responsible in full for the goods until they have been received and transferred to the buyer. This includes paying for the shipping, the duties and any other expenses incurred while shipping the goods.

Delivered Duty Unpaid - DDU

A transaction in international trade where the seller is responsible for making a safe delivery of goods to a named destination, paying all transportation expenses but not the duty. The seller bears the risks and costs associated with supplying the good to the delivery location, where the buyer becomes responsible for paying the duty and other customers clearing expenses.

Summary of terms
For a given term, "Yes" indicates that the seller has the responsibility to provide the service included in the price. "No" indicates it is the buyer's responsibility. If insurance is not included in the term (for example, CFR) then insurance for transport is the responsibility of the buyer or the seller depending on who owns the cargo at time of transport. In the case of CFR terms, it would be the buyer while in the case of CIF or CIP terms, it would be the seller.

The process for handling letters of credit

1.

The process of letter of credit starts by customer who make initial enquiry for interested goods from the selling company. 2. The selling company then sends pro-forma invoice to customer that contains information about products price and other details. 3. If customer finds products specification and prices compatible with his requirement then he has to communicate his order confirmation with selling company. 4. After order confirmation customer contact with his bank so that customers bank (issuing bank) can issue a letter of credit to sellers bank in the name of seller. 5. The sellers bank (confirmation bank) then acknowledges the letter of credit issuance and confirms it. 6. Then selling company sends shipment of goods at customer specified place. 7. Customer after receiving goods sends shipping documents back to selling company to acknowledge the deliver of goods. 8. The bank of selling company then shows commercial invoice and documents in letter of credit to issuing bank so that payment can be claimed. 9. Then issuing bank takes payment from customer and transfer it to confirming bank. 10. Confirming bank then transfer this payment to seller.

Characteristics of letters of credit

An arrangement by banks for settling international commercial transactions Provide a form of security for parties involved Ensure payment, provided that terms and conditions of credit have been fulfilled Payment based on documents only and not on merchandise or services involved

Letter of credit forms

1. Revocable letter of credit L/C that may be amended or canceled any time by the buyer (the account party) without the approval of the seller (the beneficiary). Since it does not provide any protection to the seller, it is rarely used. Some banks even refuse to issue such L/Cs because of the fear of getting involved in the possible litigation between the buyer and the seller. 2. Unconfirmed Irrevocable Letter of Credit An irrevocable letter of credit opened by an issuing bank but not confirmed by an advising bank (usually a prime world bank) is known as an unconfirmed irrevocable letter of credit. The promise to pay comes from the issuing bank only, unlike in a confirmed irrevocable L/c where both the issuing bank and the advising bank promise to pay the beneficiary. 3. Confirmed Irrevocable Letter of Credit An irrevocable letter of credit opened by an issuing bank whose authenticity has been confirmed by an advising bank (usually a prime world bank) and where the advising bank has added its confirmation to the credit is known as confirmed irrevocable letter of credit. The words "we confirm the credit and hereby undertake ..." or "we add our confirmation to this credit and hereby undertake ..." normally are included in the L/c. An exporter whose method of payment is a confirmed irrevocable L/c is assured of payment even if the importer or the issuing bank defaults. The confirmed irrevocable L/c is particularly important from buyers in a country which is economically or politically unstable. In a confirmed letter of credit, the exporter or the importer pays an extra charge called the confirmation fee, which may vary from bank to bank within a country. The fee usually is added to the exporter's account. The exporter may indicate in the sales contract that the confirmation fee and other charges outside the seller's country are on the buyer's account.

Export financing
Export financing enables businesses to bring their products all over the world. There are a lot of benefits to a business selling overseas, but there can also be a lot of financial risk involved as well. It is important to fully understand the risks and the government regulations before selling overseas. If done right though it can be a very profitable venture, and can sometimes bring a business more profit than selling locally.

Commercial banks
When a commercial bank has a relationship with a major exporter, the bank can serve as an important intermediary for these transactions. Generally, commercial banks can oversee the transactions, offer credit checks on potential buyers, contract with overseas banks in dealing with foreign purchases and smooth out any currency exchanges necessary for the exporting firm. Commercial banks can offer pre-shipment credit, which is short-term financing for working capital at the beginning of the export process. Banks can also offer credit to foreign buyers, advance payment prior to currency changing hands and offer loans secured by the existence of foreign demand.

Export credit insurance

Special form of credit insurance is available to exporters against losses from both commercial and political risks. In the United States, for example, export credit insurance is written through a consortium of insurance companies organized by the Foreign Credit Insurance Association (FCIA). The Export-Import Bank of the United States assumes the ultimate liability for loss, while the FCIA

Factoring
Export factoring is a process used by some exporting companies whereby a "factor," usually an international bank, purchases the debt owed to the exporting company by a foreign client for an order. When the client has received the goods, they then pay the money owed to the factor rather than to the original exporter

Forfeiting
Forfeiting is the non-recourse discounting of export receivables. In a forfeiting transaction, the exporter surrenders, without recourse to him, his rights to claim for payment on goods delivered to an importer, in return for immediate cash payment from a forfeiter. As a result, an exporter in India can convert a credit sale into a cash sale, with no recourse to the exporter or his banker.

Bonding
Surety bond given by one party to another, protecting the second party against loss in the event the terms of a contract are not fulfilled. The surety company is primarily liable with the principal (the contractor) for nonperformance

Leasing
A finance leasealso called a capital lease or lease purchase agreement involves you selling the capital equipment you manufacture to an Australian or overseas leasing company, which then leases the equipment to an overseas buyer. It enables the overseas buyer to use the equipment over the term of the lease agreement and purchase the equipment at the end of the lease term. The lessor remains the legal owner of the equipment for the lease term.

Countertrade
Means exchanging goods or services which are paid for, in whole or part, with other goods or services, rather than with money. A monetary valuation can however be used in counter trade for accounting purposes. In dealings between sovereign states, the term bilateral trade is used. OR "Any transaction involving exchange of goods or service for something of equal value"

Barter
Exchange of goods or services directly for other goods or services without the use of money as means of purchase or payment

Compensation deal
The value of an export delivery is at least partially offset by an import transaction, or vice versa.

Buyback
Occurs when a firm builds a plant in a country - or supplies technology, equipment, training, or other services to the country and agrees to take a certain percentage of the plant's output as partial payment for the contract

Different terms of payment

There are many ways to make and receive payment in international trade. Due to the physical distances between buyer and seller, and the fact that the transaction

may have taken place without the two parties actually meeting, minimizing exposure to risk is on the minds of both parties. The buyer wants to make sure they receive their order in acceptable condition and on time, and the seller needs to know they will get paid for it.

Consignment
This is the least secure method of trading for the exporter.Consignment is the act of consigning, which is placing a person or thing in the hand of another, but retaining ownership until the goods are sold or person is transferred. This may be done for shipping, transfer of prisoners, to auction, or for sale in a store (i.e. a consignment shop). Features of consignment are: 1. The relation between the two parties is that of consignor and consignee and not that of buyer and seller 2. The consignor is entitled to receive all the expenses in connection with consignment 3. The consignee is not responsible for damage of goods during transport or any other procedure. 4. Goods are sold at the risk of consignor. The profit or loss belongs to consignor only.

Open Account
This is the less secure method of trading for the exporter, but the most attractive to buyers. Goods are shipped and documents are remitted directly to the buyer, with a request for payment at the appropriate time (immediately, or at an agreed future date). An exporter has little or no control over the process, except for imposing future trading terms and conditions on the buyer. Clearly, this payment method is the most advantageous for the buyer, in cash flow and cost terms. As a consequence, Open Account trading should only be considered when an exporter is sufficiently confident that payment will be received.

Documents against Acceptance (D/A)

Used where a credit period (e.g. 30/60/90 days - 'sight of document' or from 'date of shipment') has been agreed between the exporter and buyer. The buyer is able to collect the documents against their undertaking to pay on an agreed date in the future, rather than immediate payment. The exporter's documents are usually accompanied by a "Draft" or "Bill of Exchange" which looks something like a cheque, but is payable by (drawn on) the buyer. When a buyer (drawee) agrees to pay on a certain date, they sign (accept) the draft. It is against this acceptance that documents are released to the buyer. Up until the point of acceptance, the exporter may retain control of the goods, as in the D/P scenario above. However, after acceptance, the exporter is financially exposed until the buyer actually initiates payment through their bank. Bills for Collection are used in certain markets (particularly Asian) to fulfil Exchange Control Regulations. They are a cost-effective method of evidencing a transaction for buyers, where documents are handled (and reported) via the banking system

Documents against Payment (D/P)

Usually used where payment is expected from the buyer immediately, otherwise known as "at sight". This process is often referred to as "Cash against Documents". The buyer's bank is instructed to release the exporter's goods only when payment has been made. Where goods have been shipped by sea freight, covered by a full set of Bills of Lading, title is retained by the exporter until these documents are properly released to the buyer. Unfortunately, for airfreight items, unless the goods are consigned to the buyer's bank no such control is available under an Air Waybill or Air Consignment Note, as these documents are merely "movement certificates" rather than "documents of title" (Under URC522, goods

should not be consigned to a bank without prior approval.) . Similarly there is no such control available for road or rail transport.

Letters of Credit (L/Cs)

A Letter of Credit (also known as a Documentary Credit ) is a bank-to-bank commitment of payment in favour of an exporter (the Beneficiary), guaranteeing that payment will be made against certain documents that, on presentation, are found to be in compliance with terms set by the buyer (the Applicant). Like Bills for Collections, Letters of Credit are governed by a set of rules from the ICC. In this case, the document is called; "Uniform Customs and Practice" and the latest version is document number 600. In short, it is known as UCP600 and, again, over 90% of the world's banks adhere to this document. Irrevocable: The terms and conditions within a L/C cannot be changed without the express agreement of the Beneficiary. Under UCP600, revocable L/Cs are no longer acceptable under any circumstances. Unconfirmed: The payment commitment within the L/C is provided by the Applicant's issuing bank. Confirmed: If an exporter has any concerns about the circumstances which may prevent payment being made from either the Issuing Bank or buyer's Country, the adding of "Confirmation" moves the bank/country risk issues to the bank which adds its confirmation (the confirming or advising bank) and notifies the DC to the exporter. The price of such a confirmation will obviously depend upon the level of perceived risks to be covered. Banks can often provide indicative pricing for confirmations prior to the arrival of the DC, so that costs can be estimated.

Advance Payment
The most secure method of trading for exporters and, consequently the least attractive for buyers. Payment is expected by the exporter, in full, prior to goods being shipped. As one might imagine, having covered the two extremes on the Payment Risk Ladder, commercial decisions have to be made and this usually results in selecting one of the middle rungs of the ladder. This is where banking products such as Bills for Collection and Letters of Credit come in to play.