Letter of Credit

Letter of credit is an agreement between issuing bank (bank of the buyer), on behalf of one of its customers (applicant or buyer), authorizing another bank, known as the advising bank (bank of the seller), to make payment to the(seller). The issuing bank, on the request of its customer (applicant), issues the letter of credit. The issuing bank makes a commitment to honor drawings made under the credit. The beneficiary is usually the provider of goods or services.

Letter of Credit elements:

It is well known that each bank has its own formula in the design of the letter of credit, but all of these formulas in banks of all countries are subject to specific international standards

Letter of credit content must include the following:

Applicant:
 the buyer who need to purchase goods or services, apply the LC to the issuing bank.

The applicant fills the LC paper (agreement) with all information related to his company (company name, phone,
fax...etc.) also he fill same information related to the seller and other conditions.

Beneficiary:
 the seller who provides goods or services and receives a swift copy of LC from his bank (advising bank) through issuing bank (bank of the buyer)

Total amount of the order also added into LC

Port of loading: is a place (port) while the seller load the cargo on board

Port of destination: is a place (port) while the buyer receive goods which shipped by the seller

Documents:

Documents are the most important terms required to clear goods from customs after goods arriving and this operation called "customs clearance", the required documents to be requested by the applicant and mentioned in LC are:

·      Commercial invoice

·      Certificate of origin

·      Bill of lading

·      Certificate of weight

·      backing list

And any other additional certificates such as certificate of insurance, inspection certificate and whatever   

Shipping Terms:

When you decide to drive for somewhere you will look for the best ways can take you to your destination easily, also when you decide to choose a way to ship your goods, if you need it safer you can choose CIF (Cost, Insurance and Freight).

These types of shipping defined as The Incoterms (International Commercial Terms) are a universally recognized set of definitions of international trade terms, such as FOB, CFR and CIF.

Incoterms are used throughout the world and are accepted by banks, customs authorities, all types of carriers, transportation intermediaries and financial institutions.

In the below is a list of the most common Incoterms:

EX-WORKS

(FOB (Free On Board

(CFR (Cost and Freight

(CIF (Cost, Insurance and Freight

FCA (Free Carrier)

 The goods cleared by the seller, exporter, and manufacturer for export and then delivered to the carrier specified by the buyer at the specified place. If the specified place is the seller’s factory, the seller will be in charge of loading the goods onto the transport vehicle. If the specified place is any other location, the seller will not be responsible for the transportation of goods.

Carrier can be a shipping line, an airline, a trucking firm, a railway or a freight forwarder.

FAS (Free Alongside Ship):

The seller clears the goods for export then places them alongside the vessel at the “specified port of shipment”. The buyer will be responsible for the loading fee, the main carriage, the cargo insurance and other costs implicated.

LCs can also be used in the payment terms of FAS transactions.

DDP (Delivered Duty Paid):

The seller clears the goods and makes them available to the buyer at the specified place of destination, cleared for import but not unloaded from the transport vehicle.

The exporter assumes therefore all responsibilities for delivering goods, including important clearance, duties and other costs payable upon import.

DDU (Delivered Duty Unpaid):

The seller also clears the goods for export and makes them available to the buyer at the destination place. However, cargo remains un-cleared for import. The buyer bears the import customs clearance, duties, administrative charges and any other costs upon import as well as the transport to the final destination.

The above-defined terms are a brief summary of the Chamber of Commerce Incoterms in their latest publication.

There are some other terms issued by the ICC but they are not as frequently used as the ones just mentioned. These terms are:

-         CPT (Carriage Paid To)

-         CIP (Carriage and Insurance Paid To)

-         DAF (Delivered At Frontier)

-         DES (Delivered Ex Ship)

-         DEQ (Delivered Ex Quay)

Note: the importer chooses Terms which suits him to be added into LC terms, most of shipping terms are no longer useful for importers due to high risk included.

The most popular terms in using are (FOB, CFR, and CIF).

Continue Reading... Labels: Letter Of Credit

Terminology of export and import-part.2

DDP (Deliver Duty Paid) 

Pricing condition states that the seller fulfills its obligations to deliver the goods to the buyer ,or the seller “exporter is responsible for the goods from since loading on board to the buyer” importer” warehouse  and this condition represents the upper limit of the obligation for the seller. We can say here deliver door to door. 

Certificate of Origin

A certificate issued by the Chamber of Commerce in the exporting country indicating their place of manufacture or production of the goods to be exported. It is a necessary document to identify the nationality of the goods in order to estimate the rates of fees, and utilized in the control of the province to prevent leakage of prohibited goods.

Note:

- Certificate of origin is an important to show the country of origin to the customs

-if there was an agreement between the country of the exporter and the country of importer it will be appreciated (but how?), for example: if there was an agreement between china and USA states that any product coming from china has no tariffs in USA customs except cars, so if you were live in USA and import anything from china except cars you will not pay any tariffs in customs clearance, and certificate of origin was the evidence that improved that the goods coming from china therefore you can gain the benefit of the agreement.   

Backing List

A Document issued by the exporter shows the contents of each package (package number, weight of the goods, the importer’s name, and the commercial invoice no.), simply it describes the products and specifications accurately.

Note: backing list is issued to show a number, it focus on number of packages.

Certificate of Weight

A Certificate showing the true weight of the goods and demand for goods, mostly based on weight, such as rice, sugar and iron

Note: certificate of weight shows net weight of goods and gross weight

MFN (Most Favored Nation)

a clause added to the treaties and agreements of economic, financial, air and sea, which would commit both countries to grant the same privileges or other facilities or exemptions previously granted or may grant in future to a third country, which is one of the principles of the WTO “world trade organization”

Demurrage

A Fees paid by the importer for the delay in the return shipping containers in the port of destination after giving him a week or two weeks or as agreed between the shipping company and importer.

Demurrage is calculated by counting the days from The period started at the date of goods arrival at the port of destination to the date ended by returning empty containers to the port (received by the shipping company)

Storage Fees 

A fees paid (by custom broker authorized from the importer) for customs for a storage yards in the port and it paid after the expiry of the grace period given.

Note:

-The importer can store the goods only within the specified period given by customs and any additional day is counted as a storage fees.

-the authorized custom broker must finish all procedures with in the specified period.

-the grace period is different from a country to another as rules in each country.

Customs Duties
Are taxes levied usually on goods imported into the country or exported from, and this tax may be valorem estimated percentage of the value of the item, or may take the form of a fixed amount imposed on the item regardless of the value and known as Tax-quality, away of tariffs, the custom duties are mainly used as a tool for the collection of revenues to the government and as a tool to protect domestic producers from the foreign competition.

Next>Terminology of export and import-part.3

Continue Reading... Labels: IMPORT EXPORT

Terminology of export and import-part.1

Proforma invoice

Is an invoice issued by the seller “exporter” at the beginning of the deal to inform the importer “buyer” by all prices and terms, and this document is adjustable for many times till the importer confirm the order.

Note: this document does not include into LC also there is no need to certify from chamber of commerce.    

Commercial Invoice
is an invoice showing the quantity and value of the goods, specifications and delivery terms. This document issued by the seller and it should be certified from the Chambers of Commerce in seller’s country.

Bill of lading
is a Document issued by the carrier, which is a contract of carriage between the Exporter and the carrier, this document “Bill of lading” shows port of loading, port of destination, a means of transport, freight and payment method.

Bill of lading is considered a confirmation from the carrier with receipt the goods in the holds of the ship.

Bill of lading is an ownership contract for the importer therefore it describes goods in brief description and mention the destination.

Air Waybill
is a Document constitutes an acknowledgment and confirmation of the carrier who is ready for transporting goods.

Waybill
is a written list of the names and descriptions of cargo on a vehicle or a train or a car, and it is the official document can be accepted by the transport company in the case of the importer claimant transport company or the insurance company for the cost recovery of the lost or damaged goods during the shipping. 

EXW (Ex-Works or EX-Factory)

Is a condition pricing is limited to the liability of the seller in the preparation of goods to the buyer in the premises of the vendor, such as factory or warehouse, the buyer bears all costs of transporting goods as well as any risks resulting from the receipt of goods from the seller access to places, and represents this condition the minimum obligation for the Seller.

FOB (Free On Board)
is a condition of Pricing indicate that  the price of shipped goods includes only the price of the goods loaded on board in a specific place, the exporter is no longer responsible for goods after loading it on board, and the buyer bears all costs and risks that may occur to goods in vessel .

Note: the importer “buyer” has to find a carrier and pay shipping costs by himself.

CFR (Cost and Freight)

The exporter “seller” clears goods for export and is responsible for delivering goods into port of loading. Transport or Shipping costs are included (to ship goods to port of destination by the seller “exporter”)  

However, once the goods pass the ship’s rail at the port of shipment, the buyer assumes responsibility for risk of loss or damage,

Note: I don’t prefer CFR term because it has no insurance so the importer will force much risks.

CIF (Cost Insurance and Freight)

The price of goods includes (cost of goods, shipping costs and insurance cost) so we can say that the exporter who find the carrier and insurance company and pay all costs for both.

> Next Terminology of import and export part.2

Continue Reading... Labels: IMPORT EXPORT