Terms of Sale
Cost and Freight
Cost, Insurance and Freight
Free on Board
Free Alongside Ship
Using Terms of Sale in a Quotation
Methods of Payment
Payment in Advance
Letters of Credit
Letters of Credit
Confirmed Letter of Credit
Irrevocable and Revocable Letters
Letters of Credit at Sight
Time or Date Letters of Credit
A Typical Letter of Credit
Tips on using a Letter of Credit
To establish an overseas price, you need to consider many of the same factors involved in pricing for the domestic market.
These factors include competition; costs such as production, packaging, transportation and handling, promotion and
selling expenses; the demand for your product or service and the maximum price that the market is willing to pay.
There are three common methods of pricing exports:
In addition, consider your company's objectives and the price sensitivity and uniqueness of your product. A Price
Determination Worksheet has been included in Appendix H in order to aid you in calculating the proper export price of
- Domestic Pricing is a common but not necessarily accurate method of pricing exports. This type of pricing uses
the domestic price of the product or service as a base and adds export costs, including packaging, shipping and
insurance. Because the domestic price already includes an allocation of domestic marketing costs, prices determined
using the method might be too high to be competitive.
- Incremental cost pricing determines a basic unit cost that takes into account the costs of producing and selling
products for export, and then adds a markup to arrive at the desired profit margin. To determine a price using
this method, first establish the "export base cost" by stripping profit markup and the cost of domestic selling.
In addition to the base cost, include genuine export expenses (export overheads, special packing, shipping, port
charges, insurance, overseas commissions, and allowance for sales promotion and advertising) and the unit
price necessary to yield the desired profit margin.
- Cost modification involves reducing the quality of an item by using cheaper materials, simplifying the product
or modifying your marketing program, which lowers the price.
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In international trade, an export quotation includes the price and all of the principal conditions of a possible sale. Basically,
the quotation describes a product, its price, payment terms, delivery period and the place of delivery. Many times
it is advantageous to include gross and net shipping weight in this description. With this information, the buyer can
make inland forwarding plans, and many times this measurement is helpful in the determination of import duties at the
The most common method of providing a sales quotation is the "pro forma" invoice. A pro forma invoice is not used
as a form of prepayment, but rather to further describe products, price, payment terms, and delivery information so the
buyer can arrange funds. Many banks provide their customers with a checklist for preparing this information.
A pro forma invoice should include a statement certifying that the pro forma invoice is true and correct and a statement
naming the country of origin of the goods. Also, the invoice should be conspicuously marked "pro forma invoice." It is
good business practice to include a pro forma invoice with any international quotation, whether it has been requested or
not. A Sample Pro Forma Invoice can be found in Appendix I and a detailed explanation of the terms involved can be
found in the Export Documents section of this book. We have also included a Glossary of Exporting Terms in
Appendix C of this publication for your reference.
Generally, price quotations should state explicitly that they are subject to change without notice. If a specific price has
been agreed upon or guaranteed by the exporter, the precise period during which the offer remains valid should be
specified in the pro forma invoice.
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Terms of Sale
Since an entirely different set of terms is used in international trade, the buyer and the seller must have a common
understanding of the terms of sale. Based upon the quoted terms of sale, your responsibility for insurance coverage
will be clarified in terms called Incoterms®. These Incoterms® are used universally to determine who pays for what
and when the responsibility for goods transfers from the seller to the buyer. Information on new terms can be obtained
from the International Chamber of Commerce at www.iccwbo.org/incoterms and other sources. Of note, Incoterms®
are reviewed and modified every 10 years. Buyer and seller should not only use Incoterms® but should also ensure that
they are using the same year. The following are descriptions of some of the most common terms and definitions used in
CFR (Cost and Freight)
— Seller quotes a price for the cost of goods, which includes the cost of inland and overseas
transportation from the point of origin to port of debarkation. If additional charges outside of the agreed freight charges
are charged, they fall to the account of the buyer. Insurance is the responsibility of the buyer. For example, you will see
this as "CFR Lagos, Nigeria." This basically means that your quotation will show the costs involved in landing the goods
at the port of Lagos, Nigeria.
CIF (Cost, Insurance,and Freight) — Seller quotes a price for the costs of the goods, insurance, inland and overseas
transportation as well as the miscellaneous charges from the point of origin to a named port of debarkation of a vessel
FOB (Free on Board)
— Seller quotes a price for the cost of goods which includes the cost of loading that good into
trucks, rail cars, barges or vessels at a designated point. The buyer assumes responsibility for ocean transportation and
FAS (Free alongside ship at designated port of export) — Seller quotes a price for the cost of goods which includes the
charge for delivery of the goods alongside a vessel at the designated port. The seller is also responsible for the unloading
and wharf fees. Loading aboard the vessel, ocean transportation, and ocean cargo insurance are the responsibility of the
EXW (EX Works named point of origin) — Price quoted applies only at the point of origin and the seller agrees to
place the goods at the disposal of the buyer at a specified place on a certain date or within a fixed period. All other
charges are the responsibility of the buyer. Many times this term is seen in forms such as EXW Factory or EXW Warehouse.
Most often EXW is used to indicate that title transfers at the seller's loading dock, and that all responsibility for
the goods then belongs to the buyer.
Using Terms of Sale in
When quoting a price, the exporter should make it meaningful to the prospective buyer. For example, a price for industrial
machinery quoted "FOB Columbia, MD, not export packed" would be meaningless because most prospective
buyers would have difficulty determining the total costs. Therefore, they would be hesitant to place an order.
For this reason, it is advisable to quote CIF whenever possible because it is easily understood by your prospective customer.
A freight forwarder can help you determine a CIF price. However, some countries will not permit quotes in CIF.
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Methods of Payment
There are various methods of receiving payment for your exports. These methods include payment in advance, letters of
credit, documentary drafts and open account.
Payment in advance. This method is most desirable from the seller's standpoint because all risk is eliminated. While cash
in advance may seem most advantageous to you, insisting on these terms may cost you sales. Just like domestic buyers, foreign buyers prefer greater security and better cash utilization. Some buyers may also find this requirement insulting,
especially if they are considered credit-worthy in the eyes of the rest of the world. Advance payments and progressive
payments may be more acceptable to a buyer, but even these terms can result in a loss of sales in a highly competitive
Letters of credit. A letter of credit (LC) is a payment method, which substitutes the credit-worthiness of a bank for that
of a buyer. Thus, the importer, or buyer, applies to a bank for the LC. An irrevocable LC cannot be changed without
the expressed permission of the exporter. If an irrevocable letter is confirmed by a U.S. bank, it virtually eliminates the
foreign credit risk of an export sale. In part, a letter of credit also protects the buyer, because a bank cannot pay the
exporter until the exporter presents documents that comply fully with the terms and conditions of the letter of credit.
Of note, in practice, LCs are hard to use with perishable goods as the definition of "quality" that may be part of the contract,
and therefore the LC, may be subject to interpretation. In short, LCs are not often used with perishables.
Payment under a LC can be at sight, a certain number of days after sight, or by a date certain. At sight signifies that payment
must be made within 72 hours, upon presentation of the required documents. Payment a certain number of days
after sight means that the exporter will be paid sometime after negotiation or acceptance of the documents. Payment at
a date certain is at a date fixed by the terms of the LC.
When deciding whether to use a LC, consider the additional cost of bank confirmation and related fees. The greater the
value of your shipment, the greater the fees are.
Another factor is the possibility that competitors may offer payment terms more favorable to the buyer. Generally, the
cost of a LC to the importer is significantly higher than the cost to an exporter. Due to these higher costs, some importers
may not accept your payment terms. Consult an experienced international banker to determine which payment
method is right for your business.
A "draft" is a written demand by the exporter directing the importer to pay to the order of a third
party. There are three types of documentary drafts: sight drafts, time drafts and date drafts.
A sight draft is used when the seller wishes to retain title and control of the shipment until it reaches its destination and
is paid for. Before the order can be released to the buyer, the original bill of lading must be properly endorsed by the
buyer and surrendered to the carrier of the goods. In actual practice, shipment is made on a negotiable bill of lading that
is given to the shipper. The bill of lading is endorsed by the shipper and sent to the buyer's bank or to another intermediary
along with the sight draft, invoices, and other necessary supporting documents specified by the buyer or the
buyer's country. Some of the necessary supporting documents are packing lists, consular invoices or insurance certificates.
The bank notifies the buyer that it has received these documents and as soon as the draft is paid, the bank will
turn over the bill of lading, enabling the buyer to obtain the shipment. This method does involve some risk because the
buyer's ability and willingness to pay may change between the time the goods are shipped and the time the draft is presented
for payment. Also, there exists the risk of a change in the policies of the importing country. If the buyer cannot or
will not pay for the goods, the return or disposal of the goods becomes the responsibility of the exporter.
A time draft can be used to require payment within a certain time frame after the buyer accepts the draft and receives
the goods. By signing and marking "accepted" on the draft, the buyer is formally obligated to pay in the determined
period of time. When this signature is received, the draft is called "trade acceptance" and can either be kept by the
exporter until maturity or sold to a bank at a discount so the exporter can receive immediate payment. There is a certain
risk involved for the exporter because a buyer may delay payment by delaying acceptance of the draft or refusing to pay
at its maturity. In most countries, an accepted time draft is stronger evidence of debt than an unpaid invoice.
A date draft differs slightly from a time draft in that it specifies a date by which the payment is due rather than establishing
a time period. When a sight or time draft is used, a buyer can delay payment by delaying acceptance of the draft,
but the use of a date draft can prevent this occurrence.
Open Account. Selling on open account carries the greatest risk for the exporter. Under this method the buyer does not
pay for the goods until they have been received. If the buyer refuses to pay, the only recourse of the exporter is to seek
legal action in the buyer's country. Thus, the open account method should only be utilized when there is an established
relationship with the buyer and the country of the buyer possesses a stable political and economic environment. If your
sales must be made on open account, the date upon which the payment is due should be stipulated.
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Letters of Credit
If the buyer pays in advance, he risks that the goods may not be sent. Similarly, if the seller ships the goods before he receives
full payment from the buyer, he risks not being paid. To cover these risks, buyers, sellers, and banks use documentary
letters of credit in international trade transactions. Under this method, the supplier requires these documents to be
presented before payment is made.
Essentially, a letter of credit adds a bank's promise of paying the exporter to that of the foreign buyer once the exporter
has complied with all of the terms and conditions of the letter of credit. The foreign buyer or "applicant" applies for issuance
of a letter of credit to the exporter or "beneficiary."
When using a documentary letter of credit, parties base payments on terms contained within the documents, not on the
terms of sale, nor the conditions of the goods sold. Before the bank completes the payment process, it verifies that all
documents comply with terms in the letter of credit. If a discrepancy exists between the required documents and terms
in the letter of credit, the non-complying party must reconcile the differences before payment can be made. Thus, the
letter of credit mandates full compliance of documents as specified by the letter of credit.
Confirmed Letter of
Credit: The foreign bank often issues the letter of credit, while the U.S. bank confirms it. With
confirmation, the U.S. bank adds its promise to pay to that of the foreign bank. U.S. exporters concerned about the
political or economic risk associated with the country in which the bank is located may wish to obtain a confirmed letter
of credit. An international banker or the local U.S. Department of Commerce district office can help exporters evaluate
these risks and determine whether a confirmed letter is necessary. Alternatively, an "advised" letter of credit, in which
the U.S. bank gives advice without officially confirming, may be appropriate.
Irrevocable and Revocable
Letters of Credit: If a letter of credit is irrevocable, the buyer and the seller cannot make a
change unless both agree to it. In contrast, the buyer or seller can unilaterally make a change with a revocable letter of
credit. Therefore, most exporters advise against the use of a revocable letter of credit.
Letter of Credit
at Sight: The terms of the letter of credit require immediate
Time or Date Letter of Credit:
The terms of the letter of credit do not require payment until a
Banks charge fees, usually a small percentage of the amount of payment, for handling letters of credit. They also charge
fees for any amendment made to the letter of credit after it has been issued. All quotations and drafts should explicitly
state that fees are to be charged to the buyer's account, since the buyer generally incurs all fees.
All terms of sale should be clearly specified, since payment is made according to the document's contents. For example,
"net 30 days" should be specified as "net 30 days from acceptance" or "net 30 days from date of bill of lading" to avoid
confusion and delay of payment. Likewise, the currency of payment should be specified as "US$xxx" if payment is to be
made in U.S. dollars. International bankers can offer other helpful suggestions.
An exporter usually does not receive payment until the advising or confirming bank receives the funds from the issuing
bank. To expedite the receipt of funds, wire transfers may be used. However, for an additional charge, the exporter may
be able to receive funds immediately by discounting the letter of credit at the bank. Exporters should consult with their
international bankers about the bank policy toward letters of credit.
Each documentary letter of credit must contain
the following information:
- Expiration date (latest shipping date)
- Dollar amount covered under such credit
- Name and address of buyer (applicant)
- Name and address of seller (beneficiary)
- Reimbursing instructions
Also, the most common documents required under commercial letters
of credit are:
- Commercial Invoice
- Customs Invoice
- Certificate of Origin
- Packing List
- Clean on Board Bills of Lading
- Insurance Policy or Certificate
- Airway Bill
A Typical Letter of Credit Transaction
Below is the typical process that takes place when payment is made
by an irrevocable letter of credit, which a U.S. bank confirmed:
- After the exporter and customer agree on the terms of sale,
the customer arranges for its bank to open a letter of credit.
Delays may be encountered if, for example, the buyer had insufficient
- The buyer's bank prepares an irrevocable letter of credit, including
all instructions to the seller concerning the shipment.
- The buyer's bank sends the irrevocable letter of credit to a
U.S. bank requesting confirmation. The exporter may request that
a particular U.S. bank be the confirming bank, or the foreign
bank may select one of its U.S. correspondent banks.
- The U.S. bank prepares a letter of confirmation to forward to
the exporter along with the irrevocable letter of credit.
- The exporter reviews carefully all conditions in the letter
of credit. The exporter's freight forwarder should be contacted
to make sure that the shipping date can be met. If the exporter
cannot comply with one or more of the conditions, the buyer should
be alerted at once.
- The exporter arranges with the freight forwarder to deliver
the goods to the appropriate port or airport.
- When the goods are loaded, the forwarder completes the necessary
- The exporter (or freight forwarder) presents to the U.S. bank
documents indicating full compliance with the terms stated in
the letter of credit.
- The bank reviews the documents. If they are in order, the documents
are airmailed to the buyer's bank for review and transmitted to
- The buyer (or agent) gets the documents that may be needed to
claim the goods.
- A draft, which may accompany the letter of credit, is paid by
the exporter's bank at the time specified or may be discounted
at an earlier date.
Tips on Using a Letter of Credit
Follow the tips below to avoid shipment delays for time-consuming
and costly letter of credit amendments. Present this list to your
- The exporter should carefully compare the letter of credit terms
with the terms stated on the pro forma quotation. This is extremely
important since the terms must be precisely met or the letter
of credit may be invalid and the exporter may not be paid. If
there are any discrepancies (including spelling mistakes), the
customer should be notified immediately, and an amendment should
be requested to correct the problem.
- Confirm that the amount of credit is sufficient to cover all expenses you want the bank to repay (freight, insurance,
forwarding fees, consular fees, inspection fees, etc.). Banks pay only the amount specified in the letter of
credit, even if higher charges for shipping, insurance, or other factors are documented.
- Be sure the letter of credit is irrevocable and will be confirmed by a prime U.S. bank. Stipulate that payment
will be made upon presentation of documents to the U.S. bank confirming the credit.
- If your credit provides for separate amounts for the merchandise
and for shipping expenses, be sure that sufficient funds are established
for each, since banks cannot permit merchandise funds to be used
for expenses, and vice versa.
- Be sure your bank is shown as the beneficiary, with its name
and address spelled correctly.
- Be sure your correct name is shown as the "opener,"
since the same name must usually appear as the "buyer"
and "importer" on your shipping documents.
- Require only documents you know your bank can supply, and if
"analysis" or inspection" certificates are to be
furnished, specify who to issue them and at whose expense.
- If the goods may be shipped in standard shipping containers,
be sure to specify that "container bills of lading"
are acceptable. Difficulties also may be avoided if the letter
of credit and bill of lading clauses specify "shippers load
and count" and "on deck or underdeck loading at carrier's
- If shipment is to move via barge, to be towed by tugs, or to
be loaded aboard LASH ships (described below), be sure to specify
this fact in your letter of credit. You should also consider stating
in the letter of credit that "bills of lading are acceptable
as 'on board' when issued by steamship companies for reloading
on LASH ship."
- If "charter party" bills of lading are acceptable,
this fact must be specifically stated in the letter of credit.
- Describe merchandise ordered in English, and in as general and
as broad of terms as possible.
- If you must describe the type of insurance coverage required,
be sure that type, such as "all risks", is available
for the specific goods being shipped.
- Allow partial shipments and part payments in your letter of
credit to avoid the necessity of expensive and delaying credit
amendments should single packages be short-shipped or damaged
on the wharf. Also, specify that any statement of quantity (gallons,
ton, etc.) is approximate and not exact.
- Provide in the credit that shipment via air or parcel post is
allowed, if your order may be so shipped. If air freight shipment
is required, provide in the letter or credit that only one copy
of the air waybill is required, and that it is consigned directly
to you or your agent ("to order" air waybills are prohibited).
- Be sure adequate time is allowed for manufacturing, shipment,
and presentation of documents before credit expiration (in general,
a minimum of two months).
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Collections is the process in which an instrument or document accompanied by a draft is presented to an entity for payment.
A draft is the negotiable instrument, which contains an order to pay. It must be signed by the seller and be payable
at sight or within a certain time period. Purchased by your foreign buyers, drafts are used in order to pay the bills owed
to you, the exporting company or individual. The most commonly employed type of collection is documentary collections,
which were described under the previous heading of Methods of Payment.
Local banks offer a selection of collection products. These products provide your organization with an efficient, costeffective
alternative to the in-house handling of collections. For international collections, banks offer lockboxes and
electronic data interchange (EDI).
There are two main types of lockboxes, the wholesale and the retail lockbox. The wholesale box is geared toward low
volumes of high dollar remittances. Most times the bank will assign an individual teller to a specific group of customers
so that he is trained in those customers' special needs and requirements. The retail lockbox service is created for those
organizations that receive a high volume of low-dollar remittances accompanied by a scannable document. This retail
lockbox system reduces in-house processing costs and the transactions are assigned a unique identification number,
which creates a complete audit trail of the deposited checks.
Electronic Data Interchange (EDI), the computerized exchange of information in a standardized format, is quickly
becoming vital for a successful business. Customers of the bank can initiate electronic payments or collections accompanied
by complete invoice and shipping information needed by a supplier to post the payment. The EDI provide an
efficient, cost-effective alternative to handling incoming payments. These advantages include a quick response to trading
partners who are using EDI, an improved accuracy of cash flow forecasting, improved control over expected payments
or receipts, reduced internal processing and banking transaction costs, reduced time and cost of collecting, tracking and
updating open receivables, the notification of incoming payments or collections and a fully automated update of your
accounts receivable system.
To determine the best type of collections for your company or for more detailed information about the various services
offered, contact your local bank's international division.
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