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Contents

INTERNATIONAL TRADE DOCUMENTATION AND PAYMENT METHODS .......................................... 2


ABSTRACT AND LEARNING OUTCOMES .............................................................................................. 2
1. TYPES OF INTERNATIONAL TRADE DOCUMENTATION.................................................................... 2
1.1 International Commercial Contracts ....................................................................................... 2
1.2 International Transport Documentation................................................................................. 4
1.2.1 Bill of Lading ..................................................................................................................... 4
1.2.2 Road Waybill (CMR) ......................................................................................................... 5
1.2.3 Air Waybill (AWB) ............................................................................................................. 5
1.2.4 Rail Waybill (CIM) ............................................................................................................. 6
1.2.5 Dangerous Goods Note .................................................................................................... 6
1.3 Customs Documentation......................................................................................................... 6
1.3.1 License .............................................................................................................................. 6
1.3.2 TIR Carnet ......................................................................................................................... 6
1.3.3 ATA Carnet ....................................................................................................................... 7
1.3.4 Export Invoice................................................................................................................... 7
1.3.5 Certificate of Origin .......................................................................................................... 8
1.3.6 EUR1 (Movement Certificate) .......................................................................................... 8
1.3.7 Single Administrative Documents (SAD) .......................................................................... 8
1.3.8 Packing List ....................................................................................................................... 9
2. PAYMENT METHODS ............................................................................................................... 10
2.1 Determining the Payment Method - Key Factors ............................................................. 11
2.2 Open Account.................................................................................................................... 12
2.3 Bills for Collection.............................................................................................................. 12
2.4 Letters of Credit (L/Cs) ...................................................................................................... 13
2.5 Advance Payment.............................................................................................................. 14
SUPPORTING MATERIALS AND LINKS ................................................................................................ 15
APPENDICES....................................................................................................................................... 16
A. THE INCOTERMS ..................................................................................................................... 16
B. DOCUMENT TEMPLATES ......................................................................................................... 20
Sample Letter of Credit (General) ............................................................................................ 20
Sample Letter of Credit (Irrevocable) ....................................................................................... 21

INTERNATIONAL TRADE DOCUMENTATION AND PAYMENT METHODS


ABSTRACT AND LEARNING OUTCOMES
The purpose of this training module on International Trade Documentation and Payment
Methods is to inform companies, which do not have enough experience in international
trade activities, on how they should prepare their necessary documents for international
trade. By providing information regarding individual types of trade documents used in
international trade and deciding the right payment method this module might help the
trainees to be equipped with knowledge of paper work while they are taking first steps in
exports and expand their business.
By the end of this module the trainees are expected to learn about:
o Use of Incoterms incorporated in commercial contracts
o Which types of documentation is needed for transportation and customs clearance
o Key factors in determining the payment methods in international trade.
The training module proceeds as follows. In the first part, main types of international trade
documents of contacts, transport and customs are elaborated. In the second part, payment
methods and key factors in determining the right method are described.

1. TYPES OF INTERNATIONAL TRADE DOCUMENTATION


International trade documentation is used to keep shipment and delivery on schedule, to
describe cargo, for customs clearance, to indicate the ownership of goods for collection
purposes or in the event of dispute, and to obtain payment.
The following documents are commonly used in exporting, but which of them are necessary
in a particular transaction depends on the product being shipped as well as on the
requirements of the national government and the government of the importing country.
Exporters should always check with their national Export Portal or other reliable sources to
determine which documents they need. Making sure that sellers and buyers have the right
documentation is a vital part for the international trade. Thorough and accurate paperwork
minimises the risk of problems and delays.

1.1 International Commercial Contracts


Internationally trading companies should have a written contract whenever they pay for
goods, especially when they do not take possession of them at the time of payment. Traders
should make sure they have documentation for the sale, even if it is just a simple description
of goods, quantity, and price. For further information about the properties and provisions of

the contracts, please refer to the training module on International Negotiations and
Contracts.
1.1.1 Contract Documentation and Incoterms
The contract should set out where the goods are being delivered. It should cover who is
responsible for every stage of the journey, including customs clearance, and what insurance
is required. It should also make it clear who pays for each different cost.
To avoid confusion, internationally agreed Incoterms should be used to spell out exactly
what delivery terms are being agreed, such as:
x
x
x
x

where the goods will be delivered


who arranges transport
who is responsible for insuring the goods, and who pays for insurance
who handles customs procedures, and who pays any duties and taxes

For example, a seller might agree to deliver goods, at his expense, to a port in the buyer's
country. The buyer might then take over responsibility, arranging and paying for customs
clearance and delivery to his premises. The seller might also be responsible for arranging
insurance for the goods until they reach the port, but pass this cost on to the customer.
1.1.2 What is Incoterms?
International Commercial Terms (Incoterms) rules are an internationally recognised standard
and are used worldwide in international and domestic contracts for the sale of goods. They
were first published by the International Chamber of Commerce (ICC) in 1936 and since then
have been updated in 1953, 1967, 1976, 1980, 1990, 2000 and the current revision had been
in 2010 which came into effect on 1 January 2011.
The basic purpose of each Incoterm is to clarify how functions, costs and risks are split
between the buyer and seller in connection with the delivery of the goods as required by the
sales contract. Delivery, risks and costs are known as the critical points. Each term clearly
specifies the responsibilities of the seller and the buyer. The terms range from a situation in
which everything is exclusively the responsibility of the buyer to the other extreme where
everything is exclusively the responsibility of the seller.
1.1.3 Incorporating Incoterms 1
It is important to ensure that where the protection of Incoterms is intended to be
incorporated into a contract of sale that an express reference to the current edition of
Incoterms is always made. Alternatively, suitable wording can be included in the contract
stating that the contract is subject to Incoterms 2010. However, if this is the case, the
contracting parties should be careful to ensure that standard contracts, and any other
standard paperwork mentioning Incoterms, are updated to quote "Incoterms 2010" ((ICC
Publication No. 715) rather than Incoterms 2000.
1

Explanations of Incoterms 2010 can be found in Appendix A.

Failure to incorporate the correct version of Incoterms could result in dispute as to which
version is intended or, indeed, if Incoterms were intended to be incorporated at all.
The complete definition of each term is available from ICC, and can be obtained by
purchasing the Incoterms Reference Book through their online bookstore at
www.iccbooks.com.

1.2 International Transport Documentation


Transport documentation is needed to provide instructions to the carrier on what should be
done with the goods. These documents can be used to pass responsibility for, and
sometimes ownership of, the goods during their journey.
Depending on the means of transport used and the specified requirements of the national
customs authorities, the following key documents are generally required to be presented to
the customs authorities:
1.2.1 Bill of Lading
The Bill of Lading (B/L) is a document issued by the shipping company to the operating
shipper and acknowledges that the goods have been received on board. The B/L serves as a
proof of receipt of the goods by the carrier obliging them to deliver the goods to the
consignee. B/L contains the details of the goods, vessel and port of destination. It evidences
the contract of carriage and conveys title to the goods, meaning that the bearer of the Bill of
Lading is the owner of the goods.
Types of Bills of Lading:
x Received Bill - confirms the goods are in the hands of the carrier, but not that they
have been loaded.
x Shipped Bill - once the goods are loaded the Bill can be stamped (notated) with a
Shipped on Board date;
x FIATA Bill - designed to be used as a multimodal or combined transport document
with negotiable status which has been developed by the International Federation of
Forwarding Agents' Associations (FIATA).
x Transhipment Bill - in the case where the goods are not shipped direct to a port of
discharge but via a third port, using two vessels, it is possible to obtain a Bill covering
both vessels (Feeder and Ocean vessel) and showing the transhipment port.
x Groupage Bill - in the case where a forwarding agent groups various export
consignments together into one load, such a load will be covered by one set of
Groupage Bills (often with a container manifest).
x Claused Bill (Dirty or Foul) - in the case where a carrier does not think the goods are
in apparent good order and condition" the Bill will be claused to reduce the
carrier's liability. Such Bills can be either - Clean Bills of Lading - stating that the
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goods have been received in an apparent good order and condition or - Unclean or
Dirty Bills of Lading - indicate that the goods are damaged or in bad order. In such
case, the financing bank may refuse to accept the consignor's documents.
x Stale Bill - a Bill which is not available on arrival of the goods is known as Stale. The
consequence is that the goods cannot be cleared until at least one original is
available. Causes delay and potentially increased costs in the form of Warehousing
and Demurrage.
x Sea or Liner Waybill due to problems with the Stale Bills, particularly on short sea
transits, a Waybill may be issued as an alternative. It is a Receipt and Evidence of
the Contact of Carriage but NOT a Document of Title. The goods will be released to
the named consignee. The advantage is the convenience in that the Waybill is not
needed to obtain possession of the goods, BUT it does not provide the security of
the full Bill of Lading. Sea Waybills are used on deep-sea routes, particularly in the
North Atlantic, where security of title is less of a problem. These are often referred
to as Express Bills as they allow express release of the goods.
x Lost or Destroyed Bill in this case delays are inevitable but can be reduced by the
use of a Letter of Indemnity. This will allow release of the goods at destination
without presentation of a valid Bill. The original (or the replacement) set will be
produced at a later date. The Indemnity is invariably required to be counter-signed
by a bank, and should not be accepted at destination without the approval of the
shipper.
1.2.2 Road Waybill (CMR)
The Road Waybill is a document containing the details of the international transportation of
goods by road, set out by the Convention for the Contract of the International Carriage of
Goods by Road 1956 (the CMR Convention). It enables the consignor to have the goods at his
disposal during the transportation. CMR must be issued in quadruplicate and signed by the
consignor and the carrier. The first copy is intended for the consignor, the second remains in
the possession of the carrier, the third accompanies the goods and is delivered to the
consignee, and the last copy is used for statistical and other purposes and it is intended for
the customs authorities if required. Usually, a CMR is issued for each vehicle.
The CMR note is not a document of title and is non-negotiable.
1.2.3 Air Waybill (AWB)
The Air Waybill is a document proving the transport contract between the consignor and the
carrier's company. It is issued by the carrier's agent and falls under the provisions of the
Warsaw Convention. A single AWB may be used for multiple shipments of goods. It contains
three originals and several extra copies. One original is kept by each of the parties involved
in the transport process (the consignor, the consignee and the carrier). The copies may be
required at the airport of departure/destination and for further freight carriers. The AWB is a
freight bill which evidences a contract of carriage and proves receipt of goods.

The IATA Standard Air Waybill is used by all carriers belonging to the International Air
Transport Association (IATA) and it embodies standard conditions associated to those set out
in the Warsaw Convention.
1.2.4 Rail Waybill (CIM)
The Rail Waybill (CIM) is required for the transportation of goods by rail. It is regulated by
the Convention concerning International Carriage by Rail 1980 (COTIF-CIM). The CIM is
issued by the carrier in five copies, where the original accompanies the goods and the
duplicate of the original is kept by the consignor. The three remaining copies are used for
internal purposes by the carrier. The CIM is considered the Rail Transport Contract.
1.2.5 Dangerous Goods Note
The Dangerous Goods Note (DGN) is a transport document that gives details about the
contents of a consignment to carriers, receiving authorities and forwarders.
The document is used to accompany hazardous goods in transit. A DGN is used when
transporting goods using all forms of transport except air freight, when the IATA Dangerous
Goods Declaration is normally used. (For further information about moving dangerous
goods, please visit: https://www.gov.uk/moving-dangerous-goods)

1.3 Customs Documentation


1.3.1 License
Any company willing to export or import goods has to check if it needs a license.
There are controls on exports of military or related goods, technology, artworks, plants and
animals, medicines and chemicals. Licence requirements may depend on the potential use of
the item, e.g. if it has a military application (usually referred to as dual-use goods) and where
it is exported to.
There are also controls on imports including firearms, plants and animals, foods, medicines,
textiles and chemicals. Whether a licence needed can also depend on where the goods are
coming from.
Exporters and importers should never ignore the fact that exporting or importing controlled
goods without the right licence is a criminal offence, so it is important that they check first.
A licence may be needed even on single or temporary exports or imports, i.e. taking samples
to fairs or exhibitions.
1.3.2 TIR Carnet
TIR Carnets are customs transit documents used for the transportation of goods where a
part of it is made by road. TIR Carnets allow the movement of goods under the so called TIR
Procedure laid down in the 1975 TIR Convention, signed under the auspices of the United
Nations Economic Commission for Europe (UNECE).
The TIR system places the following requirements:

x transportation of the goods is done in secure vehicles or containers;


x all duties and taxes at risk throughout the journey are covered by an internationally
liable guarantee;
x the transported goods are accompanied by a TIR Carnet;
x customs control measures in the country of departure are accepted by the countries
of transit pass and the country of destination.
1.3.3 ATA Carnet
ATA carnets are international customs documents issued by chambers of commerce in most
countries throughout the world for the purpose of allowing temporary import of goods that
are free of customs duties and taxes. ATA carnets can be issued for the following categories
of goods:
x commercial samples and advertising videos;
x goods for international exhibitions and fairs;
x professional equipment.
1.3.4 Export Invoice
Export invoices are;
x
x

Commercial Invoice - Standard company invoice, as for domestic sales and no specific
layout requirements.
Commercial Invoice with a Declaration - a written declaration must be added to the
invoice, the wording being dependent on the country of destination. Usually refers to the
country of origin and the fact that the prices are true and correct or in accordance with
current price lists. Such document is often drafted in the language of the destination
country. The exact wording being available from a variety of reference sources, e.g.
Croner's Reference Book for Exporters, etc.

Commercial Invoices Requiring 3rd Party Verification:


x
x
x

Certified Invoice - Chambers of Commerce certify that the signatory of the invoice is
authorised to make declarations on behalf of the company.
Legalised Invoice - Following Certification it may also be necessary to obtain the
Legalisation of the commercial section of the buyer's embassy in the sellers country.
Consular Invoice - Blank Consular invoices must be obtained from the nearest regional
Consulate of the country of destination, completed and returned with Commercial
Invoices, Bills of Lading, Certificates of Origin, etc. to be Consularised. Exporters should
take into consideration that the fees may be high (some charging a % of the invoice
value).

Specific Invoices - Variations from the obsolete Commonwealth Preference System. The
import country's invoice must be used instead of the exporter's standard invoice. Often
Certificates of Value and Origin (C V/O). No other special requirements.

1.3.5 Certificate of Origin


A Certificate of Origin is a signed statement indicating the country of origin of the exported
goods for a particular shipment. The country of origin is not necessarily the country from
where the product is shipped. The country of origin is the country where the product has
been manufactured or last underwent a substantial change or transformation.
The Certificate of Origin is a document issued and/or endorsed by designated local
authorities, usually the Chambers of Commerce in the EU Member States. The Certificate is
required for the purposes of:
x
x
x

meeting customs requirements in the importing state;


meeting quota requirements imposed by the importing country;
complying with banking requirements.

Even though the commercial invoice usually includes a statement of origin, many countries
require a separate certificate issued from authorities of the exporting country. Customs'
offices use this document to determine whether a preferential duty rate applies on the
products being imported and whether a shipment may be legally imported during a specific
quota period.
1.3.6 EUR1 (Movement Certificate)
EUR1 Form, also known as a Movement Certificate, is a type of certificate of origin which
entitles goods which "originate" in the EU to receive preferential import duty treatment
when shipped to, currently, twenty four foreign markets. These markets are; Albania,
Algeria, Bosnia Herzegovina, Chile, Croatia, Egypt, Faroe Islands, Iceland, Israel, Jordan,
Lebanon, Liechtenstein, Macedonia, Mexico, Montenegro, Morocco, Norway, Serbia, South
Africa, Switzerland, Syria, Tanzania and Tunisia.
In completing the EUR1 form exporters or their authorised agents must make a statement
that the goods "originate" in accordance with certain rules of origin.
1.3.7 Single Administrative Documents (SAD)
The S.A.D is aimed at ensuring openness in national administrative requirements, rationalize
and reduce administrative documentation, reduce the amount of requested information and
standardize and harmonize data. Designed originally as a first step towards the abolition of
the formalities in intra-EU trade, the S.A.D has, within the framework of the completion of
the internal market, been virtually eliminated from intra-EU trade. On the other hand, it is
still used for the movement of non-EU goods inside the EU.

The information should be contained therein the document; identification of data of the
parties involved, customs-approved treatment, data of the goods, means of transport,
country of origin, commercial and financial information, declaration and method of payment
of import taxes, and list of documents associated with the SAD (Import licences, inspection
certificates, document of origin, transport document, commercial invoice etc.). For further
information
about
SAD
and
its
provisions,
please
visit:
exporthelp.europa.eu/DocumentsForCustomsClearance)
1.3.8 Packing List
The Packing List is an itemised list of articles usually included in each shipping package. It
gives the quantity, description, and weight of the load contents. The Packing List is prepared
by the shipper and sent to the consignee for accurate information of the delivered goods.
The Packing List is also called as Bill of Parcels, Packing Slip, or Unpacking Note.
Even though a Packing List is not required by the Customs laws of every country, its use can
be crucial to the successful completion of the exporting process. Packing lists come in
various formats, all with the same basic functions:
x To confirm the contents of a shipment as it left the exporters premises.
x To indicate weights, measures and the piece count (i.e. the number of cartons or
cases) in that shipment.
The packing lists applied in international trade are considerably more detailed and
informative than a standard domestic packing list, as they itemize the material in each
individual package and indicate the type of package, such as a box, crate, drum, or carton.

2. PAYMENT METHODS
There are several broad issues that affect what payment method will ultimately be used in
an international transaction. Every participant in the transaction must consider these issues,
though they will affect each differently and to a different degree.
Payment methods in international trade are largely similar to those in domestic business.
However, due to the added risks and complexities involved in cross-border transactions,
certain terms are more often seen in international trade. In international trade, the means
of payment are frequently known as the "terms of payment." There are four commonly used
terms of payment, each of which offers different levels of risk and stability for buyers and
sellers.
Getting paid for providing goods or services is critical for any business. However, getting paid
for an international transaction (also commonly known as "export receivables") can be a
very different experience from securing payment on business with other national entities,
due to the number of extra factors that can influence the process.
Buyer and Seller
The buyer and the seller are at the heart of every business transaction. Both parties have
one thing in common: to profit from the transaction and to expose themselves to the least
risk possible. All transactions, no matter how innocent, expose buyers and sellers to risk.
Fundamentally, the concerns of the buyer and the seller are the same in both domestic and
international transactions, where the buyer wishes to get the goods ordered and paid for,
and the seller wishes to get paid for the goods shipped. International transactions, however,
add a layer of uncertainty and risk for the buyer and seller that does not exist in purely
domestic transactions. In the international transactions the buyer and seller are separated
by long distances, differences in culture and business tradition, different government and
economic systems, different currencies, and different banking and legal systems to name but
a few.
The following table gives an overview of the key issues for the buyer and the seller in terms
of international payments:
x
x
x
x
x
x

BUYER
Certainty in secure delivery of
goods purchased
Quality of goods

x
x
x
x
x
x

Condition of goods
Timely receipt of goods
Transaction financing
Costs of transportation and
insurance
10

SELLER
Certainty of getting paid
Assurance in equal quantity of goods
shipped and goods received
Condition of goods
Timely shipment of goods
Assurance in getting paid
Costs of transportation and insurance

2.1 Determining the Payment Method - Key Factors


The terms of payment used in an international transaction will depend on the relationship
between the seller and the buyer, the nature of the goods, industry norms, the distance
between the buyer and seller, the potential for currency fluctuation, and political and
economic stability in either or both countries. All of these factors must be considered before
deciding on a method of payment that is acceptable to both parties.
The single most important factor, however, is the nature and length of the business
relationship between the buyer and seller. Trust and confidence in the other party go a long
way in both parties' willingness to accept payment terms bearing a higher degree of risk.
Security of Payment Terms
It is, of course, the desire of all parties for a transaction to have absolute security. The seller
wants to make absolutely certain he gets paid, while the buyer wants to make absolutely
certain he gets the goods as ordered. In fact, there cannot be absolutes of certainty for both
parties to a transaction. If one has absolute security (seller gets prepayment or the buyer
gets the goods before making payment) the other party correspondingly loses a degree of
security. International transactions, therefore, often require a compromise on the part of
the seller and the buyer that leads to relative security for both.
Payment Risk Ladder
It is often a good idea during or even before contract negotiations that exporters and
importers consider where, on the diagram below, they will be comfortable in placing
themselves.

EXPORTER
Least Secure

IMPORTER

OPEN ACCOUNT

Most Secure

BILLS FOR COLLECTION


LETTER OF CREDIT
Most Secure

ADVANCE PAYMENT

11

Least Secure

2.2 Open Account

Documents and Goods

SELLER

BUYER
Payment

This is the least secure method of payment 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.
It should be noted that in certain markets, such as Europe, buyers will expect Open Account
terms. The financial risk can often be mitigated by obtaining a credit insurance policy to
cover the potential insolvency of a customer, which provides reimbursement up to an
agreed financial limit. There are a number of commercial insurers who specialise in this
market.
2.3 Bills for Collection
More secure for an exporter than Open Account trading, as the exporter's documentation is
sent from exporters bank to the buyer's bank. This invariably occurs after shipment and
contains specific instructions that must be obeyed. Should the buyer fail to comply, the
exporter does, in certain circumstances, retain title to the goods, which may be recoverable.
The buyer's bank will act on instructions provided by the exporter, via their own bank, and
often provides a useful communication route through which disputes are resolved.
The Bills for Collection process is governed by a set of rules, published by the International
Chamber of Commerce (ICC) called "Uniform Rules for Collections" document number 522
(URC522). Over 90% of the world's banks adhere to this document. Any interested foreign
trade company can pick up a copy from the ICC (www.iccbooks.com) or from their bank and
familiarise themselves with the contents.
There are two types of Bills for Collection, which are usually determined by the payment
terms agreed within a commercial contract. Each of them provides exporters with different
benefits, as explained below in more details:

12

Documents against Payment (D/P)


The Documents against Payment are 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 the Air Waybill, as this document is merely a "movement
certificate" rather than a "document 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.
Documents against Acceptance (D/A)
The Documents against Acceptance are 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
the 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.
2.4 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 the
terms set by the buyer (the Applicant).

13

Like the 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 which latest version is
document No 600. In a nutshell, it is known as UCP600 and, again, over 90% of the world's
banks adhere to this document.
The L/Cs can be of the following types:
x

x
x

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 Documentary
Credit (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.

The above means that the exporter and buyer can agree detailed terms, as part of the
commercial contract. This can include exactly what documents need to be produced and
precisely what detail such documents should quote. Letters of Credit also offer benefits in
terms of finance. Trading companies should speak to their banks to see how they can help.
Additionally, commercial insurers now offer an insurance-backed product that covers the
same basic risks as confirmations. Details should be discussed the relevant insurer.
x

Standby Letters of Credit (SBLCs) or Bank Guarantees: SBLCs are similar to Bank
Guarantees in that they sit behind a transaction and are only called upon if the buyer
fails to pay in the normal course of business (which is often Open Account). They can
be particularly useful to cover an underlying financial risk where multiple payments
are to be made, possibly as part of an agreed schedule. However, they do not offer
the documentary control of Letters of Credit to buyers and, as such they are an
unconditional guarantee.

2.5 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

14

rungs of the ladder. This is where banking products such as Bills for Collection and Letters of
Credit come in to play.

SUPPORTING MATERIALS AND LINKS


About International Trade Documentation:
Trade documentation: http://www.youtube.com/watch?v=Ch4C79NgN9o
http://www.youtube.com/channel/UCQvw9CYtMWXcWdt7THFZ5QA

Incoterms Tutorial:

http://www.youtube.com/watch?v=gXD5ajEfUR4

15

APPENDICES
A. THE INCOTERMS
The eleven Incoterms are split into four distinct groups:
x
x
x
x

Group E - where the goods are made available to the buyer at the seller's premises;
Group F - where the seller must deliver the goods to a carrier appointed by the
buyer;
Group C - where the seller must contract for the carriage of the goods without
assuming risk of loss of, or damage to the goods or additional costs due to events
occurring after shipment;
Group D - where the seller has to bear all costs and risks required to bring the goods
to the place of destination.

The following is a list of all Incoterms 2, the group to which they belong and a brief outline of
responsibilities of the seller and the buyer under that Incoterm. However, it should be
remembered that this is just a brief outline and is not a substitute for reading and
understanding Incoterms 2010 itself. Additionally, it has been noted whether the term is
suitable for any mode of transport or just conventional maritime and inland waterway
transport.

Group E
Incoterm
Definition

Obligations of the seller

Obligations of the buyer

Method of Transport

Ex-Works (EXW)
The Incoterm Ex-Works (EXW) means the seller minimises his
risk by making the goods available at his own premises. The
buyer loads the goods then arranges and pays for transport,
customs clearance and insurance.
Responsible for making the goods available to the buyer from
sellers premises or an appointed place (such as a factory or
depot). Once the sellers have made the goods available they are
no longer responsible for them.
Must arrange and pay for the transport having taken delivery of
the goods. The buyer is responsible for the goods, and anything
that happens to them having taken delivery of them. EXW
means that the buyer carries all the risk and bears the entire
cost for the movement of the goods once they are made
available at the seller's premises.
Because the responsibility for moving goods is entirely up to the
buyer, EXW can be used for all types of transport.

Group F
Incoterm

Free Carrier (FCA)

Four previously defined terms of Delivered at Frontier (DAF), Delivered Ex Ship (DES), Delivered Ex Quay
(DEQ), Delivered Duty Unpaid (DDU) in Incoterms 2000, have been eliminated from Incoterms 2010 and the
new terms of Delivered at Place (DAP) and Delivered at Terminal (DAT) took their place.

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Definition

Obligations of the seller

Obligations of the buyer

Method of transport
Incoterm
Definition

Obligations of the seller

Obligations of the buyer

Method of transport
Incoterm
Definition

Obligations of the seller


Obligations of the buyer
Method of transport

All three Incoterms beginning with "F" - Free Carrier (FCA), Free
Alongside Ship (FAS) and Free On Board (FOB) - mean the seller
is responsible for arranging and paying for delivering the goods
to a carrier. The buyer pays for the main carriage onward from
that point.
Must deliver the goods to a named place, by any means of
transport, and for them to be cleared for export to a main
carrier. The seller is responsible for the goods until they reach a
named place and enter the carrier's possession.
Selects the main carrier. The arrangements with the carrier can
then be organised by the buyer or seller on the buyer's behalf.
The buyer becomes responsible for the goods once they enter
the carrier's possession at a named place. They also have
responsibility for costs of onward transport. Either the buyer or
seller can arrange the main carriage, but the buyer pays.
All modes of transport.
Free Alongside Ship (FAS)
All three Incoterms beginning with "F" - Free Carrier (FCA), Free
Alongside Ship (FAS) and Free On Board (FOB) - mean the seller
is responsible for arranging and paying for delivering the goods
to a carrier. The buyer pays for the main carriage onward from
that point.
Must complete all export documentation, arrange and be
responsible for the carriage of goods to bring them alongside a
ship at a named port of shipment. The seller is also responsible
for clearing goods for export.
Either the buyer of seller can arrange the main carriage, but the
buyer pays. Once the goods have been delivered alongside ship,
the buyer becomes responsible for all risks and costs associated
with the goods.
Only for sea or inland waterway transport.
Free On Board (FOB)
All three Incoterms beginning with "F" - Free Carrier (FCA), Free
Alongside Ship (FAS) and Free On Board (FOB) - mean the seller
is responsible for arranging and paying for delivering the goods
to a carrier. The buyer pays for the main carriage onward from
that point. The seller arranges all export documentation and has
to bring the goods right up to the point of passing over a ship's
rail at a named port of shipment.
Responsible for delivering the goods to a carrier chosen by the
buyer. This means that the seller is responsible for the goods
The costs and risks associated with the goods only become
buyers responsibility when the goods pass across a ship's rail.
Only for sea or inland waterway transport.

Group C
Incoterm
Definition

Cost and Freight (CFR)


The seller is responsible for arranging and paying for the main
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Obligations of the seller

Obligations of the buyer

Method of transport
Incoterm
Definition

Obligations of the seller

Obligations of the buyer


Method of transport
Incoterm
Definition

Obligations of the seller

Obligations of the buyer

Method of transport
Incoterm
Definition

Obligations of the seller

Obligations of the buyer

Method of transport

carriage, but the risk of damage or extra costs stays with the
buyer.
Arranges the carriage. The seller is then responsible for the goods
only until they pass a ship's rail in the port of shipment but must
pay the costs for bringing the goods to the port of destination, i.e.
the full journey by water.
Responsible for the goods and all associated extra costs and risks
once they have been delivered over a ship's rail at the outgoing
port.
Can only be used for goods shipped by sea or inland waterway.
Cost Insurance and Freight (CIF)
The seller is responsible for arranging and paying for the main
carriage, but the risk of damage or extra costs stays with the
buyer.
Has the same obligations as a seller using the CFR Incoterm.
However, under CIF the seller is also responsible for arranging
and paying for insurance covering the buyer's risks during
movement of the goods.
Responsible for the goods and all associated risks once they have
been delivered over a ship's rail at the port of shipment.
Can only be used for goods shipped by sea or inland waterway.
Carriage Paid To (CPT)
The seller is responsible for arranging and paying for the main
carriage, but the risk of damage or extra costs stays with the
buyer.
Responsible for choosing a carrier and delivering the goods to
them. The seller is also responsible for paying the cost of
transport to deliver the goods to a named destination. The seller
must also clear goods for export.
Responsible for all risks associated with the goods once they have
been delivered to the nominated carrier. The buyer pays costs
once the goods have reached their named place of destination.
The CPT and CIP Incoterms can be used for any form of transport
and for more than one type.
Carriage and Insurance Paid To (CIP)
The seller is responsible for arranging and paying for the main
carriage, but the risk of damage or extra costs stays with the
buyer.
Responsible for the same obligations under CPT. But in addition,
the seller is also obliged to arrange and buy insurance covering
the buyer's risks of damage or loss during transport.
Liable for the risks associated with the goods once they are
delivered to the carrier. The buyer is responsible for costs once
they reach their destination.
The CPT and CIP Incoterms can be used for any form of transport
and for more than one type.

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Group D
Incoterm
Definition

Obligations of the seller

Obligations of the buyer


Method of transport
Incoterm
Definition

Obligations of the seller

Obligations of the buyer


Method of transport
Incoterm
Definition

Obligations of the seller

Obligations of the buyer

Method of transport

Delivered at Place (DAP)


The seller is responsible for arranging carriage and for delivering
the goods, ready for unloading from the arriving conveyence, at
the named place.
This rule can often be used to replace the Incoterms 2000 rules
DAF, DES and DDU
Pays for carriage to the named place, except for costs related to
import clearance, and assumes all risks prior to the point that
the goods are ready for unloading by the buyer.
Responsible for import clearance and any applicable local taxes
or import duties.
Can be used for any transport mode, or where there is more
than one transport mode.
Delivered at Terminal (DAT)
The seller is responsible for carriage and for delivering the
goods, unloaded from the arriving conveyence, at the named
place.
Pays for carriage to the terminal, except for costs related to
import clearance, and assumes all risks prior to the point that
the goods are ready for unloading by the buyer.
Responsible for import clearance and any applicable local taxes
or import duties.
Can be used for any transport mode, or where there is more
than one transport mode.
Delivered Duty Paid (DDP)
The seller has to pay all costs and cover all risks involved in
bringing goods to the named place of destination. While EXW
represents the least responsibility for the seller, DDP represents
the highest responsibility for the seller.
Must deliver the goods to a named destination, unload and
clear them for import. The seller has responsibility for all costs
and risks linked to bringing the goods to the named destination.
The seller must pay all duties, taxes and charges in the country
of import.
NB: It can also be agreed that the seller is responsible for import
duties, costs and risks. If both parties agree to this arrangement,
it should be written into the contract as it is a variation of the
Incoterm.
Some taxes, such as VAT, can be excluded from the seller's
obligations and transferred to the buyer. This variation to the
Incoterm should be written into the sales contract.
NB: This Incoterm is not used if the seller is unable to arrange an
import licence.
Cover all modes of transport.

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B. DOCUMENT TEMPLATES
Sample Letter of Credit (General)

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Sample Letter of Credit (Irrevocable)

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