Foreign Trade Documents, Payment Methods in Export Import trade

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Foreign trade Documents Payment Methods in export Import trade Payment collection methods pre and post shipment in export

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Foreign trade documents, Payment Methods in Export Import trade, Payment collection Method, Export Pre and Post Shipment, Forfeiting and Factoring. Presented by: Ravish Magajwala (GM065)

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Foreign trade documents, Payment Methods in Export Import trade, Payment collection Method, Export Pre and Post Shipment, Forfeiting and Factoring. Presented by: Ravish Magajwala (GM065)

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Foreign Trade Documents

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Introduction… International market involves various types of trade documents that need to be produced while making transactions. Each trade document is differ from other and present the various aspects of the trade like description, quality, number, transportation medium, indemnity, inspection and so on. So, it becomes important for the importers and exporters to make sure that their documents support the guidelines as per international trade transactions. A small mistake could prove costly for any of the parties.

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The following is a list of documents often used in international trade: Air Waybill Bill of Lading Certificate of Origin Combined Transport Document Draft (or Bill of Exchange) Insurance Policy (or Certificate) Packing List/Specification Inspection Certificate

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Air waybills… Air Waybills make sure that goods have been received for shipment by air. A typical air waybill sample consists of three originals and nine copies. The first original is for the carrier and is signed by a export agent; the second original, the consignee's copy, is signed by an export agent; the third original is signed by the carrier and is handed to the export agent as a receipt for the goods.

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The principal requirements for an air waybill are: The proper shipper and consignee must be mention. The airport of departure and destination must be mention. The goods description must be consistent with that shown on other documents. Any weight, measure or shipping marks must agree with those shown on other documents. It must be signed and dated by the actual carrier or by the named agent of a named carrier. It must mention whether freight has been paid or will be paid at the destination point.

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Bill of Lading (B/L) Bill of Lading is the official document prepared by the carrier duly accepting the goods for shipment containing information like item, quantity, value, vessel details, date, port, consigner, consignee etc. Bill of lading is a contract to carry the goods to the said destination based on which seller can claim consideration and buyer can take delivery of the goods. Bill of lading is issued in the set of two, three or more. The number in the set will be indicated on each bill of lading and all must be accounted for. This is done due to the safety reasons which ensure that the document never comes into the hands of an unauthorized person. It will indicate whether cost of freight/ carriage has been paid or not: "Freight Prepaid”: Paid by shipper "Freight collect”: To be paid by the buyer at the port of discharge The bill of lading also forms the contract of carriage.

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The correct shipper, consignee and notifying party must be shown. The carrying vessel and ports of the loading and discharge must be stated. The place of receipt and place of delivery must be stated, if different from port of loading or port of discharge. The goods description must be consistent with that shown on other documents. Any weight or measures must agree with those shown on other documents. Shipping marks and numbers and /or container number must agree with those shown on other documents. It must state whether freight has been paid or is payable at destination. It must be dated on or before the latest date for shipment specified in the credit. It must state the actual name of the carrier or be signed as agent for a named carrier. The bill of lading must meet all the requirements of the credit as well as complying with UCP 500. These are as follows:

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Certificate of Origin The Certificate of Origin is required by the custom authority of the importing country for the purpose of imposing import duty. It is usually issued by the Chamber of Commerce and contains information like seal of the chamber, details of the good to be transported and so on.

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The name of the company and address as exporter. The name of the importer. Package numbers, shipping marks and description of goods to agree with that on other documents. Any weight or measurements must agree with those shown on other documents. It should be signed and stamped by the Chamber of Commerce. The certificate must provide that the information required by the credit and be consistent with all other document, it would normally include:

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Combined Transport Document Combined Transport Document is also known as Multimodal Transport Document, and is used when goods are transported using more than one mode of transportation. This documents need to be signed with appropriate number of originals in the full set and proper evidence which indicates that transport charges have been paid or will be paid at destination port.

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That the consignee and notify parties are as the credit. The place goods are received, or taken in charges, and place of final destination. Whether freight is prepaid or to be collected. The date of dispatch or taking in charge, and the "On Board" notation, if any must be dated and signed. Total number of originals. Signature of the carrier, multimodal transport operator or their agents. Multimodal transport document would normally show:

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Commercial Invoice Commercial Invoice document is provided by the seller to the buyer. Also known as export invoice or import invoice, commercial invoice is finally used by the custom authorities of the importer's country to evaluate the good for the purpose of taxation.

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Be issued by the beneficiary named in the credit (the seller). Be address to the applicant of the credit (the buyer). Be signed by the beneficiary (if required). Include the description of the goods exactly as detailed in the credit. Be issued in the stated number of originals (which must be marked "Original) and copies. Include the price and unit prices if appropriate. State the price amount payable which must not exceed that stated in the credit Include the shipping terms. The conditions of invoice are:

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Bill of Exchange It is a special type of written document under which an exporter ask importer a certain amount of money in future and the importer also agrees to pay the importer that amount of money on or before the future date. This document has special importance in wholesale trade where large amount of money involved.

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On the basis of the due date there are two types of bill of exchange: Bill of Exchange after Date : In this case the due date is counted from the date of drawing and is also called bill after date. Bill of Exchange after Sight : In this case the due date is counted from the date of acceptance of the bill and is also called bill of exchange after sight. Following persons are involved in a bill of exchange: Drawer: The person who writes or prepares the bill. Drawee : The person who pays the bill. Payee : The person to whom the payment is to be made. Holder of the Bill : The person who is in possession of the bill.

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Insurance Certificate It certifies that goods transported have been insured under an open policy and is not actionable with little details about the risk covered. It is necessary that the date on which the insurance becomes effective is same or earlier than the date of issuance of the transport documents.

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The name of the party in the favor which the documents has been issued. The name of the vessel or flight details. The place from where insurance is to commerce typically the sellers warehouse or the port of loading and the place where insurance cases usually the buyer's warehouse or the port of destination. Insurance value that specified in the credit. Marks and numbers to agree with those on other documents. The description of the goods, which must be consistent with that in the credit and on the invoice. The name and address of the claims settling agent together with the place where claims are payable. Countersigned where necessary. Date of issue to be no later than the date of transport documents unless cover is shown to be effective prior to that date. The requirements for completion of an insurance policy are as follow:

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Packing List It contains details about the packing materials used in the shipping of goods. It also includes details like measurement and weight of goods. The packing List must: Have a description of the goods consistent with the documents. Have details of shipping marks and numbers consistent with documents

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Inspection Certificate Certificate of Inspection is a document prepared on the request of seller when he wants the consignment to be checked by a third party at the port of shipment before the goods are sealed for final transportation.

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Payments collection methods in Export Import International Trade.

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Introduction Payment Collection against Bills also known documentary collection as is a payment method used in international trade all over the world by the exporter for the handling of documents to the buyer's bank and also gives the banks necessary instructions indicating when and on what conditions these documents can be released to the importer.

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Role of Various Parties Exporter Exporter's Bank Buyer/Importer Importer's Bank

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Documents against Payments (D/P) Also referred as Cash against Documents/Cash on Delivery. D/P means payable on demand. The collecting bank hands over the shipping documents including the document of bill of lading only when the importer has paid the bill. The drawee is usually expected to pay within 3 working days. The attached instructions to the shipping documents would show "Release Documents Against Payment"

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Documents against Acceptance (D/A) Here, the Exporter allows credit to Importer, the period of credit is referred to as Usance, The importer/ drawee is required to accept the bill to make a signed promise to pay the bill at a set date in the future. When he has signed the bill in acceptance, he can take the documents and clear his goods. The payment date is calculated from the term of the bill, which is usually a multiple of 30 days The attached instruction would show "Release Documents Against Acceptance".

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Usance D/P Bills It is an agreement where the buyer accepts the bill payable at a specified date in future but does not receive the documents until he has actually paid for them. There are different types of usance D/P bills, some of which do not require acceptance specially those drawn payable at a fix period after date or drawn payable at a fixed date. Bills requiring acceptance are those drawn at a fix period after sight, which is necessary to establish the maturity date.

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Payment Methods in Export Import Trade.

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There are 3 standard ways of payment methods in the export import trade international trade market: Clean Payment Collection of Bills Letters of Credit L/c

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Clean Payments Clean payments are all shipping documents, including title documents are handled directly between the trading partners. The role of banks is limited to clearing amounts as required. Clean payment method offers a relatively cheap and uncomplicated method of payment for both importers and exporters. There are basically two types of clean payments: Advance Payment In this method the exporter is trusted to ship the goods after receiving payment from the importer. Open Account In this method the importer is trusted to pay the exporter after receipt of goods.

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Payment Collection of Bills in International Trade Here, the exporter entrusts the handling of commercial and financial documents to banks and give the banks necessary instructions concerning the release of documents to the Importer. It is considered to be one of the cost effective methods of evidencing a transaction for buyers, where documents are manipulated via the banking system.

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There are two methods of collections of bill: Documents against Payment D/P Here the documents are released to the importer only when the payment has been done. Documents against Acceptance D/A Here the documents are released to the importer only against acceptance of a draft.

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Letter of Credit L/c It is a Documentary Credit and is a written undertaking by the importers bank known as the issuing bank on behalf of its customer, the importer (applicant), promising to effect payment in favor of the exporter (beneficiary) up to a stated sum of money, within a prescribed time limit and against stipulated documents. It is published by the International Chamber of Commerce under the provision of Uniform Custom and Practices brochure number 500.

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Various types of L/Cs are: Revocable & Irrevocable Letter of Credit (L/c) It can be cancelled without the consent of the exporter. It cannot be cancelled or amended without the consent of all parties including the exporter. Sight & Time Letter of Credit If payment is to be made at the time of presenting the document then it is referred as the Sight Letter of Credit. If payment is to be made after the lapse of a particular time period as stated in the draft then it is referred as  the Term Letter of Credit. Confirmed Letter of Credit (L/c) Under a Confirmed Letter of Credit, a bank, called the Confirming Bank, adds its commitment to that of the issuing bank. By adding its commitment, the Confirming Bank takes the responsibility of claim under the letter of credit, assuming all terms and conditions of the letter of credit are met.

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Export Pre Shipment and Post Shipment Finance.

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Introduction : Pre Shipment Finance is issued by a financial institution when the seller wants the payment of the goods before shipment. The main objectives behind Pre Shipment finance or pre export finance are to enable exporter to: Procure raw materials. Carry out manufacturing process. Provide a secure warehouse for goods and raw materials. Process and pack the goods. Ship the goods to the buyers. Meet other financial cost of the business.

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Types of Pre Shipment Finance Packing Credit Advance against Cheques/Draft etc. representing Advance Payments.

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Requirements for Getting Packing Credit This facility is provided to an exporter who satisfies the following criteria A ten digit importer exporter code number allotted by DGFT. Exporter should not be in the caution list of RBI. If the goods to be exported are not under OGL (Open General License), the exporter should have the required license /quota permit to export the goods.

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Pre shipment credit is only issued to that exporter who has the export order in his own name. However, as an exception, financial institution can also grant credit to a third party manufacturer or supplier of goods who does not have export orders in their own name.

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Quantum of Finance The Quantum of Finance is granted to an exporter against the LC or an expected order.  The only guideline principle is the concept of Need Based Finance. Banks determine the percentage of margin, depending on factors such as: The nature of Order. The nature of the commodity. The capability of exporter to bring in the requisite contribution.

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Different Stages of Pre Shipment Finance Appraisal and Sanction of Limits. Disbursement of Packing Credit Advance. Follow up of Packing Credit Advance. Liquidation of Packing Credit Advance. Overdue Packing. Special Cases. Packing Credit to Sub Supplier. Running Account facility. Pre Shipment Credit in Foreign Currency. Packing Credit Facilities to Deemed Exports. Packing Credit facilities for Consulting Services. Advance against Cheque/Drafts received as advance payment

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Export Post Shipment Finance.

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Post Shipment Finance is a kind of loan provided by a financial institution to an exporter or seller against a shipment that has already been made. This type of export finance is granted from the date of extending the credit after shipment of the goods to the realization date of the exporter proceeds. Exporters don’t wait for the importer to deposit the funds. Introduction

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Post shipment finance can be provided for three types of export: Physical exports: Finance is provided to the actual exporter or to the exporter in whose name the trade documents are transferred. Deemed export: Finance is provided to the supplier of the goods which are supplied to the designated agencies. Capital goods and project exports: Finance is sometimes extended in the name of overseas buyer. The disbursal of money is directly made to the domestic exporter.

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Types of Post Shipment Finance The post shipment finance can be classified as: Export Bills purchased/discounted. Export Bills negotiated Advance against export bills sent on collection basis. Advance against export on consignment basis Advance against undrawn balance on exports Advance against claims of Duty Drawback.

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Forfeiting and Factoring.

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Introduction Forfeiting and factoring are services in international market given to an exporter or seller. Its main objective is to provide smooth cash flow to the sellers. The basic difference between the forfeiting and factoring is that forfeiting is a long term receivables (over 90 days up to 5 years) while factoring is a short termed receivables (within 90 days).

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Definition of Forfeiting The terms forfeiting means to surrender ones right on something to someone else. In international trade, forfeiting may be defined as the purchasing of an exporter’s receivables at a discount price by paying cash. By buying these receivables, the forfeiter frees the exporter from credit and the risk of not receiving the payment from the importer.

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How forfeiting Works in International Trade The exporter and importer negotiate according to the proposed export sales contract. Then the exporter approaches the forfeiter to ascertain the terms of forfeiting. After collecting the details about the importer, and other necessary documents, forfeiter estimates risk involved in it and then quotes the discount rate. The exporter then quotes a contract price to the overseas buyer by loading the discount rate and commitment fee on the sales price of the goods to be exported and sign a contract with the forfeiter. Export takes place against documents guaranteed by the importer’s bank and discounts the bill with the forfeiter and presents the same to the importer for payment on due date.

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Documentary Requirements Invoice Shipping Bill and GR form

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The forfeiting typically involves the following cost elements: Commitment fee, payable by the exporter to the forfeiter ‘for latter’s’ commitment to execute a specific forfeiting transaction at a firm discount rate with in a specified time. Discount fee, interest payable by the exporter for the entire period of credit involved and deducted by the forfeiter from the amount paid to the exporter against the availised promissory notes or bills of exchange.

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Benefits to Exporter 100 per cent financing Improved cash flow Reduced administration cost Advance tax refund Risk reduction Increased trade opportunity Benefits to Banks Forfeiting provides the banks following benefits: Banks can offer a novel product range to clients, which enable the client to gain 100% finance, as against 8085% in case of other discounting products. Bank gain fee based income. Lower credit administration and credit follow up.

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Factoring It can be defined as the conversion of credit sales into cash. Here, a financial institution which is usually a bank buys the accounts receivable of a company usually a client and then pays up to 80% of the amount immediately on agreement. The remaining amount is paid to the client when the customer pays the debt.

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Characteristics of Factoring The normal period of factoring is 90 to 150 days and rarely exceeds more than 150 days. It is costly. 3. Factoring is not possible in case of bad debts. 4. Credit rating is not mandatory. 5. It is a method of off balance sheet financing. 6. Cost of factoring is always equal to finance cost plus operating cost.

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Different Types of Factoring Disclosed 2. Undisclosed Disclosed Factoring Here client’s customers are aware of the factoring agreement. Disclosed factoring is of two types: Recourse factoring: The client collects the money from the customer but in case customer don’t pay the amount on maturity then the client is responsible to pay the amount to the factor. It is offered at a low rate of interest and is in very common use.

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2. Undisclosed In undisclosed factoring, client's customers are not notified of the factoring arrangement. In this case, Client has to pay the amount to the factor irrespective of whether customer has paid or not. Non recourse factoring : In Non recourse factoring, factor undertakes to collect the debts from the customer. Balance amount is paid to client at the end of the credit period or when the customer pays the factor whichever comes first. The advantage of non recourse factoring is that continuous factoring will eliminate the need for credit and collection departments in the organization.

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