Terms of Sale and Payment

CPT

Carriage Paid To

CIP

Carriage and Insurance Paid To

CFR

Cost and Freight

CIF

Cost, Insurance and Freight

DDP

Delivered Duty Paid

DAP

Delivered at Place

DAT

Delivered at Terminal

Order of incoterms: transferring more responsibility from buyer to the seller

E,F,C,D

Incoterms used by any means of transportation

EXW, FCA, CPT, CIP, DAT, DAP, DDP

EXW

Ex Works

Incoterms used by oceans

FAS, FOB, CFR, CIF

FOB and FAS are the same except

FOB has the additional benefit of the seller being liable and responsible for loading the ship

FAS

Free Alongside Ship

FCA

Free Carrier

FOB

Free on Board

What currency are most international transactions in?

USD

Blockchain

alternative to current payment system used to facilitate secure payments and ensure overall security in supply chain

How Payments are Made: International Funds Transfers

banks route international payments through corresponding banks; payments may have to be routed through several intermediate banks

What is EXW and where is the named place for handing over responsibility from seller to buyer? (not a convenient arrangement bc buyer usually in poorer position than seller for arranging tasks in export country)

buyer arranges full shipment from seller's warehouse to cargo's ultimate destination; ownership changes hands at seller's premises, buyer liable for almost every step and seller only responsible for Bill of Lading or Air Waybill and ensuring goods are available for pickup

Steps involved in getting the goods whenever an exporter sells goods to a foreign company

clearing goods for export, organizing transportation, arranging insurance and filing claims, clearing customs in importing country

When transactions are made in another currency, U.S. -based buyers will need to

convert USD to foreign currency

When transactions are made in another currency, sellers will need to

convert foreign currency to USD before it is deposited into a bank account

Incoterms

divide responsibilities between seller and buyer

Sight Draft - Documents Against Payment

document issued by a bank on behalf of a customer (exporter) requiring the recipient (importer) to pay a particular amount ; importer will pay amount of draft in order to receive documents (usually bill of lading) required to obtain imported goods

One of the greatest concerns an exporter has

ensure it can collect payment from foreign customers

Factors affecting the choice of incoterm

experience with international transactions, bargaining power with carriers, desirability for control over movement of goods

Open Account

exporter ships products and invoices importer with requirement to pay in future (ex 30 days); exporter would use if importer has lots of power, no high value, ongoing relationship w importer

What are the risks to the exporter and importer with Sight Draft/Documents Against Payment?

exporter- sent goods to importer's country and importer could decide to not accept them meaning exporter has already incurred shipping costs; importer- damaged goods even though already paid, difficult to get money back from exporter

Suppose you entered into a purchase contract to buy a product from a foreign seller. Duing the time lag, there could be depreciation in the value of your currency with respect to the foreign currency, resulting in an increased cost to you (in terms of your own currency). How do you prevent this?

hedge your risk by entering into a futures contract for foreign exchange

When will an importer or exporter assume foreign exchange risk?

if sale is in foreign currency AND there is a time lag between contract date and payment date

Date (Time) Draft/Documents Against Acceptance

importer accepts draft requiring it to pay amount of draft in future and in return bank releases documents to importer allowing it to possess the goods; when payment is made by importer to bank, bank transfers funds to exporter

Payment in Advance Letter of Credit (Sight Draft) Documents Against Payment (Time/Date Draft) Documents Against Acceptance Open Account As we move up this chart, the risk to the importer _______ and the risk to the exporter _____

increases, decreases

Letter of Credit

issued by buyer's bank in favor of seller, has expiry date and sets conditions upon which payment can be made, irrevocable and confirmed by bank in seller's country

Factors to consider when choosing terms of payment

length of time you have been doing business with other party, experience and ongoing nature of relationship

What activities are not covered by incoterms and where must they be specified?

letter of credit costs, inspection costs; purchase order and commercial invoice

Payment in Advance

made by importer prior to goods being shipped, all risk transferred to importer, used for low value transactions

SWIFT system

messaging system used by banks to facilitate payments

5 terms of payment

payment in advance, letter of credit, (sight draft) documents against payment, (time/date draft) documents against acceptance, open account

What is FAS and where is the named place for handing over responsibility from the seller to the buyer? (buyer responsible for loading which is not attractive as the seller should be liable)

seller arranges all export country stages and buyer arranges all other stages to cargo's ultimate destination; seller liable for all steps in their country up until goods are alongside ship or terminal warehouse and buyer responsible for loading

What is FOB and where is the named placed for handing over responsibility from the seller to the buyer? (ideal for full container loads not LCL or air freight)

seller arranges all export country stages and buyer arranges all other stages to cargo's ultimate destination; seller liable for all steps in their country up until goods loaded onboard ship/plane

What is DAP and where is the named place for handing over responsibility from the seller to the buyer? (not convenient arrangement as seller is usually in much poorer position than buyer for arranging tasks in import country)

seller arranges entire shipment except import customs; seller continues responsibility and risk into import country usually to buyer's preferred warehouse

What is DDP and where is the named place for handing over responsibility from the seller to the buyer? (not a convenient arrangement as the seller is usually in a much poorer position than the buyer for arranging tasks in the import country; may be good choice if seller uses integrator to clear goods through customs)

seller arranges entire shipment including import customs acting as importer of record; seller is liable for entire shipment and buyer only responsible for unloading the goods

What is FCA and where is the named place for handing over responsibility from the seller to the buyer? (overcomes disadvantages of EXW where buyer is in worse position than seller for arranging for local transport and customs)

seller arranges most or all of export country stages (trucking within export country to named location) and buyer arranges all other stages to cargo's ultimate destination; responsibilities change from buyer to seller at site of delivery point, seller liable and responsible for all tasks in their country up until goods are delivered to the carrier at named place

What is CFR and where is the named place for handing over responsibility from the seller to the buyer? (suitable for full container loads, not for lcl or air freight)

seller responsible for all obligations until freight loaded onto vessel and responsbile for paying carrier freight charges; seller liable for all steps in their country up to when goods are loaded on board and also responsible (not liable) for main carriage

What is CIF and where is the named place for handing over responsibility from the seller to the buyer? (buyer depends on seller for choice of insurance and buyer may have some carriage payments and is dependent on seller for choice of carrier)

seller responsible for all obligations until freight loaded onto vessel and responsible for paying carrier freight charges and insurance; ownership changes hands once cargo is loaded onto vessel at port of export and seller responsible for paying ocean carriage charges and insurance, risk transfers to buyer before main carriage

Terms of sale

specify who is responsible for arranging aspects of international shipment and who pays for these arrangements

What is the proper choice of an incoterm contigent on?

strategies and operating practices followed by seller and buyer companies

Regardless of the choice of incoterm, what does the buyer ultimately pay for?

transportation and other shipping costs, even if these costs are "pre-paid" by the seller

The term of sale or incoterm that the seller and buyer agree to use for a given transaction defines the responsibilities of each of the parties including

which tasks will be performed by each party, who will pay for each task, when transfer of ownership for goods takes place

The choice of incoterm determines

who pays for many of the acitvities involved in an export transaction

One of the greatest concerns a foreign customer has

will receive goods paid for