The Terminology of International Trade for Used Equipment

Posted By Richard Barker on 08 May 2014

Posted in Used Equipment Buyers Guides

It is essential for any transaction between buyer and seller of used equipment to go through smoothly that, both parties, understand the terminology of international trade. Some of the terminology may be thought of as ‘jargon’, however, it is an essential tool of doing business internationally.

Most of the terminology pertains to logistics and shipping, documentation and finance/ payment. Here, we highlight these three important issues in order to help effect the successful sale and purchase of used equipment internationally:

1. Terminology/ Jargon/ Acronyms

Agreed practice is put together and updated by The International Chambers of Commerce based in Paris, France. They have produced a series of definitions known as Incoterms 2000 that are the industry standard and which delineate the transference of risk between buyer and seller. It is recommended that traders specifically refer to Incoterms 2000 when negotiating contracts for the sale of goods internationally.

The following is a list of a range of delivery option acronyms covering the responsibility undertaken by the seller/ vendor in the contract price:

EXW - Ex Works; FCA - Free Carrier; FAS - Free Alongside Ship; FOB - Free on Board; CFR - Cost and Freight; CIF - Cost Insurance and Freight; CPT - Carriage Paid To; CIP - Carriage and Insurance Paid; DAF - Delivered at Frontier; DES - Delivered to Ship; DEQ - Delivered to Quay; DDU -   Delivered Duty Unpaid; DDP - Delivered Duty Paid

The list above is by no means exhaustive and, as such, for further information on Incoterms and their full definitions, traders can visit the ICC website.

2. The Documentation Involved in a Sale/ Purchase

As responsibility is transferred, at perhaps more than one juncture during the transaction, from seller to carrier to buyer, the the various parties will need to know what their legal responsibilities are, if even, on a temporary basis. Moreover, both customs authorities and Banks transferring funds between buyer and seller will need to see appropriate documentation.

Sellers Invoice

This is necessary to accompany any export of goods and should include full details of the goods themselves; selling price specifying basis (e.g. cif or whatever); weights and country of origin.

Pro-Forma Invoice

On occasions, a buyer may require an invoice in advance of shipment in order, for instance, to access foreign currency at his bank or, perhaps, to obtain an import licence.

Export Licence

This may be required for certain classes of goods and it is the responsibility of the exporter to obtain it.

Import Licence

This may be required in parts of the world and it would normally be the responsibility of the importer/ buyer to obtain one. It may be one of the reasons that a pro-forma invoice is requested. However, exporters would be well advised to check with the buyer that any requirement for an import licence has been taken into account. No seller wants to ship goods to find out that they are turned back or indeed refused because the buyer has slipped up. So, if you are exporting, ask your customer if he requires an import licence, and if so, check that he has got the relevant licence.

Bills of Lading

These are essential documents and, in effect, act as receipts issued by the carrier accepting the cargo on board, in good order, for onward shipment. The shipping company will enter a qualifying statement on the Bill should there be any obvious damage to the goods and/ or the packaging. The importance of a “clean bill of health” cannot be overly emphasized as some methods of international settlement of invoices require that the Bills must be “clean”, and, in no way qualified.

Note that the shipping company will issue original Bills with copies and that only the original Bill, and not a copy or photocopy, is valid as a document of title. An original Bill of Lading also acts as a transferable document that can be used to transfer title. Where air freight is used instead of sea freight these documents are referred to as “Air waybills” and serve the same purpose as a Bill of Lading.

Certificate of Insurance

This should cover the goods for at least their full value. Apart from the product details and the route, allowances should be made for possible extensions of the period covered as well as transhipment. The certificate of insurance is a document that can be required during the payment process.

Certificate of Origin

Some countries require a statement verifying the country of origin or country of manufacture of the goods being imported. It is therefore prudent to get a certificate of origin as soon as is practicable. Such certificates can normally be obtained from organisations like your local Chamber of Commerce.

3. The Financial Terms of the Contract

The relationship between a seller and a buyer has a number of variable factors that can readily dictate the way in which the agreed payment terms are couched. Whilst trust between buyer and seller is important, often, standard practice within particular industries dictates the terms of trade.

Questions to Consider when Trading Internationally

How well do the seller and the buyer know each other?; Have you previously done business with one and other and what were your respective experiences?; Are there any foreseeable extraneous political or economic factors in a particular country that might affect the successful conclusion of a deal as originally agreed?; A seller will presumably invoice in his own currency, but has the buyer, who has to purchase what is to him a foreign currency, taken into account the banking costs of doing this?; Are there any industry practices to be take into account in striking the terms of a deal?; What degree of risk are you prepared to take if the settlement terms are not quite what you would like as either a seller or a buyer?

Some Accepted Methods of Payment

Open Account; i.e. goods are shipped without any guarantee of payment.

Cash in Advance; i.e. the seller receives the funds before shipping, perhaps upon raising a pro-forma invoice. The buyer has got to have confidence in the seller. This type of transaction is normally associated with sellers and new customers.

Cash with Order; i.e. the buyer pays for the goods at the time of ordering the goods.

Letters of Credit; i.e. a secure way of trading with a buyer or country that you are unfamiliar with and where you have not received cash up front. Letters of Credit used in international transactions are governed by the International Chambers of Commerce provisions for documentary credits and are binding on all parties. By definition, a Letter of Credit is a contractual agreement by an issuing bank on behalf of a customer (the buyer in the deal), authorizing another bank, known as an advising or confirming bank, to deal with the named beneficiary (the seller in the deal).

Although it may appear strange, a Letter of Credit deals with documents and not with the goods that are the subject of the contract. The terms of the credit will specify the presentation of specific, named documents within specified time limits, usually at the advising or confirming bank. Provided the issuing bank receives confirmation that the documents are in order, it will guarantee payment either at sight or at a specified date after sight of those documents.

Specified documents vis a vis a letter of credit include: An original Bill of Lading or Airway Bill (not a copy or duplicate); the Sales Invoice; and, the Insurance Certificate.

The Seller and The Letter of Credit

The seller may wish to safeguard his position by seeking a Letter of Credit which is:

Confirmed; i.e. where the seller is unsure of the foreign bank issuing the letter of credit. The seller  then he can ask for it to be “confirmed” by the advising banking his own country. Confirmation by the advising bank will mean that the advising bank itself will pay the beneficiary and, in turn, then be paid by the issuer.

Negotiable; i.e. the letter of credit should be “negotiable” so that the issuer has to pay any bank nominated by the seller.

Irrevocable; i.e. the letter of credit should be marked “irrevocable”, ensuring that the issuing bank guarantees payment provided that the terms and conditions in relation to documentation have been met.

Transferable; i.e the seller can assign or transfer the right to draw against the letter of credit if it is marked “transferable”.

Letters of Credit were always considered “money in the bank” for the seller. They are, provided that the terms and conditions regarding documentation are met in full. However, things can and do go wrong, on occasion. To mitigate against potential problems, if you are selling against a Letter of Credit, it is vital that you:

Check the way in which the terms are couched, for even a small punctuation or spelling error will cause a problem, if not noticed and rectified at the outset.

Make sure that you can meet the specified shipping dates.

If you are selling in a currency other than your own, check that the price that you put forward takes into account any exchange rate fluctuations that might occur.

To make sure that you get a clean Bill of Lading from the shipping company ensure that the packaging of goods for shipment are both appropriate and secure.