INCO TERMS

INTERNATIONAL COMMERCIAL TERMS

A codification of international rules for the uniform interpretation of common contract clauses in export/import transactions developed and issued by the International Chamber of Commerce (ICC). It defines trade contract responsibilities between buyer and seller

EX WORKS
Means that the seller fulfills his obligation to deliver when he has made the goods available at his premises (i.e. works, factory, warehouse, etc.) to the buyer He is not responsible for loading the goods on the vehicle provided by the buyer or for clearing the goods for export, unless otherwise agreed The buyer bears all costs and risks involved in taking the goods from the seller's premises to the desired destination. This term thus represents the minimum obligation for the seller

FREE CARRIER (forwarder)

"Free Carrier" means that the seller fulfills his obligation to

deliver when he has handed over the goods, cleared for export, into the charge of the carrier named by the buyer at the named place or point. This term may be used for any mode of transport, including multimodal transport.

FREE ALONGSIDE SHIP - FAS

"Free

Alongside Ship" means that the seller fulfills his obligation to deliver when the goods have been placed alongside the vessel on the quay at the named port of shipment This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that moment.

FREE ON BOARD- FOB

"Free on Board" means that the seller fulfills his obligation to deliver when the goods have passed over the ship's rail at the named port of shipment This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that point. The FOB term requires the seller to clear the goods for export

CFR - COST AND FREIGHT (... named port of destination)

Means that the seller must pay the costs and freight necessary to bring the goods to the named port of destination

CIF - COST, INSURANCE AND FREIGHT (... named port of destination )

Means that the seller has the same obligations as under CFR but with the addition that he has to procure marine insurance against the buyer's risk of loss of or damage to the goods during the carriage.

 CPT - CARRIAGE PAID TO (... named place of destination)

- Means that the seller pays the freight for the carriage of the goods to the named destination - Prepaid vs. Collect

CIP - CARRIAGE AND INSURANCE PAID TO (... named place of destination) - Means that the seller has the same obligations as under CPT
but with the addition that the seller has to procure cargo insurance against the buyer's risk of loss of or damage to the goods during the carriage.

 DAF - DELIVERED AT FRONTIER (... named place) - Means that the seller fulfills his obligation to deliver when the
goods have been made available, cleared for export, at the named point and place at the frontier, but before the customs border of the adjoining country

DES - DELIVERED EX SHIP

Means that the seller fulfills his obligation to deliver when the goods have been made available to the buyer on board The ship has cleared the border but uncleared for import at the named port of destination. The seller has to bear all the costs and risks involved in bringing the goods to the named port of destination

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DEQ - DELIVERED EX QUAY

Means that the seller fulfills his obligation to deliver when he has made the goods available to the buyer on the quay (wharf) at the named port of destination, cleared for importation The seller has to bear all risks and costs including duties, taxes and other charges of delivering the goods thereto. This term can only be used for sea or inland waterway transport.

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DDU - DELIVERED DUTY UNPAID

Means that the seller fulfills his obligation to deliver when the goods have been made available at the named place in the country of importation. The seller has to bear the costs and risks involved in bringing the goods thereto (excluding duties, taxes and other official charges payable upon importation) as well as the costs and risks of carrying out customs formalities. The buyer has to pay any additional costs and to bear any risks caused by his failure to clear the goods for import in time. This term may be used irrespective of the mode of transport.
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DDP - DELIVERED DUTY PAID

means that the seller fulfills his obligation to deliver when the goods have been made available at the named place in the country of importation. The seller has to bear the risks and costs, including duties, taxes and other charges of delivering the goods thereto, cleared for importation. This term may be used irrespective of the mode of transport. EX WORKS REPRESENT LEAST BURDEN ON SELLER WHEREAS DDP REPRESENTS MAXIMUM OBLIGATION

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FCA
Bill of Lading

FAS

loading

FOB

Factory

Ex-works

Customs

CFR

DDU

Bringing goods to the named destination without custom clearance

DDP
DES

Export clearance
DAF before the customs border

unloading

CIF
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DEQ

Insurance

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COMMON PAYMENT TERMS

Cash in Advance Letter of Credit

Documents against Payment/DA

Open Account

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CASH IN ADVANCE
Receive cash from the buyer before shipping

Telegraphic Transfer
Demand Draft

*In case of HUGE payments (importer may demand

a bank guarantee) **if exporter is in a strong trading position & particular product is not available
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Parties to a Letter of Credit

Applicant/Importer Importer is the Opener on whose behalf or account, the letter of credit is issued by his bank (Issuing Bank) Exporter Exporter is the Beneficiary of the letter of credit who is entitled to receive the payment of his bills according to the terms of Letter of Credit.
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Parties to a Letter of Credit

Intermediary Bank/Confirming Bank Usually a branch or the correspondent of the opening bank in the exporting country Advising or Notifying Bank merely forwards the credit, without any obligation on its part Confirming Bank adds its own undertakings to the credit while advising it to the beneficiary
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LETTER OF CREDIT
In short, an L/C is

A formal document of payment

Opened by a party wishing to import

Communicated through banking channels

Paid by the opening bank within a specified

timeframe upon presentation of docs

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LETTER OF CREDIT
Documentary Credit Cycle
(1) Contract

EXPORTER- SELLER (BENEFICIARY)

IMPORTER - BUYER (APPLICANT)

(5) Shipment

(4) Advising

(6) Documents for negotiation

(2) Application (8) Retirement

(9) Remit the payment

EXPORTERS BANK (NEGOTIATING/ CONFIRMING BANK)

(3) L/C (7) Dispatch of Documents Claim Reimbursement

IMPORTERS BANK (L/C ISSUING BANK)

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L/C PAYMENT PROCEDURE

Buyer and Seller agrees on terms and conditions of the sale Buyer instructs its bank to open an L/C incorporating previously agreed terms of sale The buyer's bank prepares a Letter of Credit (L/C), including all instructions to the seller's bank concerning the shipment and sends the L/C to the seller's bank, requesting confirmation The seller may request confirmation from a confirming bank for added security The Seller's bank prepares a letter of confirmation to forward to the seller along with the L/C The seller reviews carefully all conditions in the L/C, specially shipment schedule in consultation with his freight forwarder The seller arranges the goods and hand over to freight forwarder for delivery at appropriate port or airport Once goods are loaded/shipped, the forwarder completes necessary documentation and hand them over to the seller. The seller then presents the documents to his bank, informing full compliance with terms and conditions of L/C The seller's bank reviews the documents. The documents are airmailed to the buyer's bank for review and passing necessary documents to buyer. The buyer's bank sends the draft to buyer for payment/acceptance Buyer pays bank/sends acceptance The buyer gets the documents needed to claim the goods. The seller's bank gets payment and pays seller immediately or at a later date
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L/C PAYMENT PROCEDURE

Buyer and Seller agrees on terms and conditions of the sale

Buyer instructs its bank to open an L/C incorporating previously agreed terms of sale

The buyer's bank prepares and issues an L/C (including all instructions concerning the shipment) to the seller's bank, requesting confirmation
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L/C PAYMENT PROCEDURE

The seller may request confirmation from a confirming bank for added security

The Seller's bank prepares a letter of confirmation to forward to the seller along with the L/C

The seller reviews carefully all conditions in the L/C, specially shipment schedule in consultation with his freight forwarder
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L/C PAYMENT PROCEDURE

The seller arranges the goods and hand over to freight forwarder for delivery at appropriate port or airport Once goods are loaded/shipped, the forwarder completes necessary documentation and hand them over to the seller. The seller then presents the documents to his bank, informing full compliance with terms and conditions of L/C
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L/C PAYMENT PROCEDURE

The seller's bank reviews the documents

The documents are airmailed to the buyer's bank for review and passing necessary documents to buyer

The buyer gets the documents needed to claim the goods.

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L/C PAYMENT PROCEDURE

The buyer's bank returns accepted draft and informs buyer.

Buyer pays bank

The seller's bank gets payment and pays seller.

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Types of letters of credit

a. SIGHT L/C

b. USANCE L/C
c. REVOCABLE L/C d. IRREVOCABLE L/C e. CONFIRMED IRREVOCABLE L/C f. UNCONFIRMED IRREVOCABLE L/C g. WITH & WITHOUT RECOURSE L/C h. BACK TO BACK L/C
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Types of letters of credit

i. TRANSFERABLE L/C j. ANTICIPATORY L/C RED CLAUSE, GREEN CLAUSE k. REVOLVING L/C l. DEFERRED PAYMENT L/C m. TRANSIT L/C n. RESTRICTED & UNRESTRICTED L/C

o. NEGOTIABLE L/C

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Sight L/C (L/C at Sight)

Involves payment to exporter against Sight Draft

Usance L/C
Payment is made against Usance Draft
Usance Draft is jointly accepted by Issuing Bank and Importer which can be discounted through any commercial bank before due date
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Revocable L/C
can be amended/cancelled by the issuing bank w/o the consent of the beneficiary, often at the request and on the instructions of the applicant. NO security of payment Does not constitute a legally binding undertaking/limited utility/not much in use

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Irrevocable Letters of Credit

It constitutes a legally binding undertaking of the

issuing bank for the payment bills drawn under the

credit, PROVIDED the beneficiary presents the stipulated documents to the credit nominated bank or to the issuing bank and complies with all the conditions of the credit

CANT be modified OR cancelled w/o approval of the

beneficiary, therefore, widely accepted
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Confirmed Irrevocable L/C

opened by the issuing bank whose authenticity has been confirmed by the advising bank

+
the advising bank adds its confirmation to the credit

*Exporters payment is confirmed even if the importer or the issuing bank defaults.
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Unconfirmed Irrevocable L/C

opened by an issuing bank in which the advising bank does not add its confirmation to the credit The promise to pay comes from the issuing bank only, UNLIKE in a confirmed irrevocable L/C where both issuing & advising bank promise to pay the

beneficiary.

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With Recourse L/C

If the buyer fails to pay the bank after the

specified period, the bank can have

recourse on the exporter

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Without Recourse L/C

the bank has NO recourse on the exporter, IF the buyer fails to pay the bank after the specified period THE BEST L/C CONFIRMED IRREVOCABLE WITHOUT RECOURSE L/C because in this case the Indian bank has added obligation to pay

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Back to Back L/C

the exporter uses his L/C as a cover for

opening an L/C in favour of the local

suppliers

Its preferred over Transferable L/C to

maintain secrecy of the identity of

ultimate buyer
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Transferable L/C
In this the beneficiary is entitled to request the paying, accepting, negotiating bank to pay, accept, negotiate bills tendered by one or more OTHER PARTIES. E.g. LI & FUNG For partial transfer to one SECOND BENEFICIARY or more than one second beneficiaries, the credit

must permit partial shipment

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Anticipatory L/C
This credit provides for advance payment, or at least part payment to the beneficiary against his undertaking to effect the shipment and submit the bill and/or documents in terms of credit within the validity Ultimate liability lies with the applicant (buyer)

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Anticipatory L/C - Red Clause

Since the clause is printed /typed usually in red ink, its called Red Clause credits.

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Green Clause L/C

The Green Clause is an extension of the Red

Clause
it envisages the credit given to the exporter to

cover the period of storage of goods at the sea

port

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Revolving Letters of Credit

In revolving L/C, the amount involved when utilized is reinstated, without issuing another L/C and usually under the same terms and conditions. It can be revocable / irrevocable and may be revolving in relation to time or value within a given overall period of validity.
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Deferred Payment L/C

the exporter supplies plant, machineries, capital goods, etc. Importer pays in installments over a period ranging from 1 to 7 years or even more no draft is drawn, payment by the opening bank is determined in accordance with the terms laid down in the credit
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Transit L/C
It is issued in one country with the beneficiary in another country but is advised through and usually confirmed by a bank in London

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Restricted & Unrestricted L/C

If no specific bank is designated to pay, accept or negotiate, the credit is termed as unrestricted or open or general credits if a specified bank is designated to pay, accept or negotiate, the credit is termed as restricted or

special

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Negotiable L/C
Issuing Bank authorises the Negotiating Bank to

honour the drafts drawn under the terms of

credit Exporter submits docs to his bank Negotiating bank examines docs 1)sends docs to issuing bank 2)pays the exporter even before issuing bank sees the docs**
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Negotiable L/C
** if Issuing Bank doesnt pay, exporter will have to REFUND the payment L/C states that payment is allowed by

negotiation Name of bank may or may not be stated

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Contents of L/C
Be Sure to Verify:

Correct name and address of the exporter

Correct name and address of the importer

Type of L/C
Amount of L/C

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Contents of L/C
How credit shall be available e.g. by sight

payment, deferred payment, acceptance or

negotiation Name of drawee of the draft and tenor of the draft Description of goods, quantity or items and the unit price
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Contents of L/C
List of documents required to be submitted by

the beneficiary
Whether docs required are obtainable and

according to terms of sale

Port of discharge and the place of final

destination

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CONTENTS OF L/C
Terms of delivery i.e. FOB, CFR, CIF, etc.

Status of transshipment, allowed or not

Status of partial shipment, allowed or not

Last date of sending shipment

Time period for presentation of docs for

negotiation by exporter after dispatch of goods

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CONTENTS OF L/C
Date and place of expiry of L/C Transfer of L/C allowed or not Mode of advice of L/C i.e. by mail or teletransmission

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Guidelines for the Beneficiary when reviewing the L/C

Consult banker to validate L/C Terms & conditions in L/C should be as per export contract

Docs required can be obtained and presented

Last date of shipment and time allowed for

presentation of docs is feasible

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Document Collection
- DOCUMENT AGAINST PAYMENT - DOCUMENT AGAINST ACCEPTANCE

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Documents against Payment

1) The exporter makes shipment and sends the shipment 2) Exporter sends shipping documents to the his/her bank for collection 3) The exporter's bank sends the shipping

documents along with a COLLECTION LETTER to the importer's bank

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Documents against Payment

4) The importers bank sends a COLLECTION

NOTICE to the importer.

5) The importer makes payment upon receiving the collection notice 6) The importers bank receives payment, hands over the original shipping documents 7) Importer takes physical possession of goods
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Documents against Acceptance

Everything is the same as DP except.

When the importers bank sends a COLLECTION

NOTICE to the importer, the importer gives the

ACCEPTANCE to pay at a later date I/O making

payment upon receiving the collection notice

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Risks under D/P and D/A??

LIQUIDITY CRUNCH exchange control undertaking - realise export proceeds within a period of 6 months or due date

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The possible options:

Re-negotiate with importer, offer discount Bring the goods back to India Look for an alternate importer in the same

country or in another country

Go to importing country, sell goods locally

Abandon the goods

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Precautions :
Obtain credit report on the importer through bank Consign goods to the importers bank I/O the importer Should obtain Credit Risk Insurance Policy

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OPEN ACCOUNT
Ship the goods

forward the shipping docs directly to buyer

await payment

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RISK vs. TERMS of PAYMENT

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Comparison of Various Methods of Payment

Method Cash In Advance Goods Available to Buyer After Payment Usual Time of Payment Before Shipment Risk to Exporter Very Low Risk to Importer Maximum-Relies on exporter to ship goods as ordered Assured of quantity and also quality at shipment if inspection report is required Assured of quantity, also quality, if goods are inspected before shipment

Letter of Credit Confirmed Unconfirmed (Advised)

After Payment

When Very Low documents are available at shipment

Documentary After Collection Payment Sight Draft Documents against Payment

On presentation of draft to importer

If draft unpaid, goods must be returned or disposed of, usually at loss

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Comparison of Various Methods of Payment

Method Goods Available To Buyer Usual Time Of Payment
On maturity of draft

Risk To Exporter

Risk To Importer

Documentary Before payment Collection Time Draft Documents against Acceptance Consignment Before payment, exporter retains title until goods are sold or used Open Account Before payment

Relies on importer MinimalCan check to pay draft shipment for quantity and quality before payment After use; Substantial risk Very Low inventory and unless through warehousing cost foreign branch or to exporter subsidiary As agreed Relies on importer Very Low to pay as agreed complete risk

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