Logistics, Trade Administration and Supply Chain

In order to prevent misinterpretations, misunderstanding and other associated problems connected with the interpretation of trade terms, phrases and divergences in customs and practice in the international trade, the International Chamber of Commerce (ICC) has come out with a standard set of rules and interpretations known as the Uniform Customs and Practice for Documentary Credits, Publications No. 500 (in short UCP No. 500). Briefly, the UCP No. 500 sets out universally accepted procedures, liabilities, responsibilities and various terms and conditions and their respective interpretations connected with international trade. The UCP has been adopted practically by every nation in the world. Although the UCP generally does not have the force of law, their provisions are binding on the relevant parties who had adopted them. Thus, as a requirement, every application and documentary credit and amendment have to bear the words, "Subject to Uniform Customs and Practice for Documentary ...

Article 2 of the Uniform Custom and Practice for Documentary Credit defines a documentary credit as: "For the purpose of these articles, the expression documentary credits and standby letters of credit (hereinafter referred to as credits ) means any arrangements, however named or described, whereby a bank (the issuing bank) acting on request and on the instructions of a customer (the applicant) or on its own behalf: is to make a payment to or to the order of a third party (the beneficiary) or is to accept and pay bills of exchange (drafts) drawn by the beneficiary, or, authorizes another the bank to effect such payment or to accept and pay such bills of exchange (drafts) or, authorizes another bank to negotiate, against stipulated documents, provided that the terms and conditions of the credit are adhered with". In a layman language, a documentary credit may be describe as a legal undertaking in writing. It is issued by the customer's bank (also known as the issuing ba...

As indicated below, the seller may receive payment in advance or ship the goods on the mare promise of the buyer to pay either at the time of delivery or at a certain future date after delivery of the goods. To ensure a better arrangement of payment, the seller may request the buyer to make payment through a documentary credit. A documentary credit also known as a letter of credit or L/C, is an undertaking in writing given by the buyer's bank in which the buyer's bank guarantees payment to the beneficiary seller on condition that the beneficiary seller presents the stipulated documents and strictly complies with the terms and conditions mentioned in the documentary credit. We will discuss in greater details on the advantages and disadvantages of a documentary credit, how its works and the various types of documentary credit in the next chapter.

Perry's Dictionary of Banking defines a "collection as the receipt, transmission and presentation of a bill, draft, cheque or other instruments by a collecting banker for a customer and the subsequent direction of the resulting funds into the customer's account. Under this arrangement, the seller ships the goods to the buyer, engages the services of his bank to collect the proceeds from the said buyer. There are two methods of collection viz the clean collection and the documentary collection. In a clean collection, the seller ships the goods directly to the buyer. At the same time, the shipping documents are also dispatched directly to the buyer, to enable him to take delivery of the goods. The seller then draws a bill of exchange on the buyer requesting his bank to present the bill of exchange to the buyer for payment. In documentary collection, the seller ships the goods to the buyer and at the same time, he draws a bill of exchange on the buyer. The seller then hands t...

Under this arrangement, the seller gives a certain credit period to the buyer to pay the purchase price of the goods for example 60 days after the shipment of the goods or 30 days from the invoice date and so on. The goods are forwarded directly to the buyer. The invoice, insurance policy and shipping documents like bill of lading, delivery order or airwaybill are also dispatched directly to the buyer to enable him to take delivery of the goods and dispose of them. On agreed due date, the buyer makes payment accordingly. The open account payment method is commonly practiced in trading within the country i.e. local trade. Factors to be considered are: The Buyer Compliance of the contract requirements such as prompt delivery of the goods to third party buyers; prompt payment on the respective due dates to continue good track records, Foreign exchange risk. The Seller Payment made only after shipment or delivery; Buyer's credit risk and integrity; Buyer's country risk - exchange c...

As its name implies, the buyer pays in advance for the purchase of the goods. This payment method is generally practiced in the mail order trade. A typical scenario is in response to an advertisement or a circular brochure, the buyer remits payment together with the purchase order to the seller who subsequently forwards the goods. If the seller has no confidence in the credit or financial standing of the buyer ir the economic or political conditions of the buyer's country, he may not want to extend any credit and insist that the buyer pays in advance for the purchase of the goods. Certain goods may be required to be specially manufactured or assembled to specifications; thus the seller may need the buyer to make a partial payment in advance to meet the heavy tooling and other costs. Factors to be considered are: The Buyer Payment to be made prior to shipment or delivery; Exchange Control or liquidity and cash flow requirements; Seller's integrity and financial standing; Possibi...

In a typical trade transaction, one of the critical decisions facing both the buyer (importer) and the seller (exporter) relates to how and when payment for the goods sold will be made. In practice, there are various methods of trade settlement (or payment) being adopted ranging from payment in advance to payment upon delivery or even payment after a certain period from the date of delivery or shipment. The method adopted in a certain trade transaction will depend on the relationship between the buyer and the seller, and is generally adopted after due negotiation between the said two parties. When determining the appropriate method of payment, both the buyer and the seller would consider the following factors: the nature and extent of relationship between the buyer and the seller; the track record, financial and credit standing and financial needs of the buyer; the financial standing, financial needs and profit margin of the seller; the nature and extent of competition in the particula...