Outsourcing 101 – Part 3 of 3
Continued from last weeks post
9. Shipping Documentation
The following is a list of some of the main shipping forms that are necessary for international transportation of goods:
- Airway Bill
- Bank Draft / Transmittal Letter
- Canada Customs Invoice
- Commercial Invoice (English & Spanish)
- Dock Receipt
- Generic Certificate of Origin
- IMO Dangerous Goods Declaration
- Inland Bill of Lading
- Master Bill of Lading
- NAFTA Certificate of Origin (English, Spanish & French)
- Ocean Bill of Lading
- Packing List
- Pro Forma Invoice
- Shipper’s Declaration for Dangerous Goods
- Shipper’s Export Declaration (SED)
- Shipper’s Letter of Instruction
- Shipper’s Domestic Truck Bill of Lading
The recent growth of the global marketplace brings with it opportunity and thereby inherent risks for both buyers and sellers. The goal for sellers of course, is to be paid promptly without having to initiate long-distance collection procedures. Buyers want to know that the merchandise they order will arrive on time and in good condition.
Today’s economic and political uncertainties highlight the need for businesses involved in international trade to understand methods of payment, their benefits and risks. Buyer and seller negotiate payment methods based on factors such as the amount of the sale, credit standing of the buyer, foreign exchange regulations in buyer’s or seller’s country, industry customs, competition and opportunities for repeat business. The length of time the two parties have worked with each other and the amount of trust built during that time also affect the payment methods they will find acceptable. Common payment methods are listed below:
- Cash in Advance (Prepayment)
- Documentary Collection
- Open Account
- Letter of Credit (L/C)
- Standby Letter of Credit (SLC)
- Commercial Letter of Credit
How are you going to get paid for your export sales and which payment method is best suited for you?
How can you ensure that you will receive the goods you have ordered and what is the best mode of payment?
There are traditional payment methods used in international trade, which one is best for you?
These are the most common questions when it comes to International Finance. The Federal Group will help you select the best possible method of payment. We will also explain the risks involved with each method and once the choices is clear we will put you in contact with our trusted colleagues at an appropriate financial institution.
11. Letters of Credit
Buyer asks its bank to issue a letter of credit in favor of seller. Seller ships the merchandise and presents required shipping documents. Payment is then made to seller by the negotiating or paying bank. Two types of L/Cs – standby and commercial -are the most commonly used methods of payment for international commerce.
Risk / Usage: Other than cash in advance, letters of credit offer seller the greatest protection, while providing buyer with certain assurances through L/C documentation. Letters of credit are used to alleviate risk on the part of both buyer and seller in cases where the two parties have not established a long and trusting relationship.
Standby Letter of Credit (SLC): Issued to back an obligation of the applicant, SLCs are not intended to be the primary source of payment, which is often on open account. Standby L/Cs act as a bid or performance bond, backing for open account trade terms or lease obligations, or support for a credit line or other type of financial obligation. Documents are normally not required, but buyer must have access to enough credit to cover the amount of the SLC.
Commercial Letter of Credit: Primary method of international payments because most buyers and sellers are not well known to each other and a commercial L/C facilitates trade when buyer and seller do not have absolute confidence in payment or receipt of merchandise. It covers shipment of goods or payment for services and offers several protections to both parties:
- Minimizes credit risk for the exporter (seller), since payment is made by a negotiating or paying bank
Alleviates risk in buyer’s country
- Provides greater assurance to buyer that goods will arrive as ordered and in good condition
- Assures buyer that shipping documents will be in accordance with terms and conditions of the letter of credit
There are four main types of commercial L/Cs:
Sight L/C requires payment when the beneficiary presents non-discrepant documents.
Usance L/C calls for payment at a future date, e.g., 30 days after shipment date, and requires a draft drawn on the issuing/paying bank for the amount of the invoice.
Deferred Payment L/C is similar to a usance L/C, but does not require a draft. It is often used in European countries that assess high stamp taxes on drafts.
Transferable L/C gives the beneficiary the right, but not the obligation, to transfer the credit fully or partially to a third-party supplier.
Transferable L/Cs are typically used by middlemen or trading companies that do not have the
needed capital or do not wish to use their own capital to purchase goods to be delivered to another buyer. They can be structured so that the names of the supplier and final buyer are hidden. The disadvantages are high transfer costs and the difficulty of structuring transactions to hide the buyer and seller names.
Letters of credit require documentation that must be precisely in accordance with the terms and conditions of the credit before payment will be made. Many payment delays are due to discrepancies in documentation. These documents typically include:
- Commercial Invoice
- Packing List
- Shipping Document
- Ocean Bill of Lading
- Airway Bill of Lading
- Inland Bill of Lading
- Insurance Policy / Certificate
Reasons for Nonpayment
Nonpayment can result from a number of different causes, however, most happen due to errors in paperwork.
12. Doing Business With Other Cultures
Globalization: Crossing the Border
To successfully engage in global commerce, it takes more than sending faxes and receiving wire transfers from your trading partners. When we do business in other lands, it is extremely important to understand and respect the ways of different cultures. Examine fundamental practices employed by successful international business people throughout the world. Learn various cultural aspects of:
- Building the Relationship
- Titles, Rank, & Hierarchy
- Building Rapport
- Gifts & Hosting Visitors
- Using Intermediaries
The world is getting smaller and those who are not involved in global commerce will be left behind. Develop an awareness of the global market place and how to build your company’s international strategies. Follow some of these important guidelines to move your business in the right direction:
- Carefully assess your capabilities
- Be flexible in picking a market
- Prepare a variety of market entry strategies
- Be diligent about conducting due diligence
- Put adequate financing in place
- Get your shipping and logistics in order from start to finish
- Choosing the best payment method
- Build on your success
We sincerely hope you found this article informative and valuable. We welcome your comments or suggestions regarding this article or any other subjects you would like to see us write about.
The Federal Group USA
By Robert Levy – CEO TFGUSA
© Copyright 2017