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Pricing
The Quotation
Terms of Sale
Cost and Freight
Cost, Insurance and Freight
Free on Board
Free Alongside Ship
EX Works
Using Terms of Sale in a Quotation
Methods of Payment
Payment in Advance
Letters of Credit
Documentary Drafts
Open Account
Letters of Credit
Confirmed Letter of Credit
Irrevocable and Revocable Letters
of Credit
Letters of Credit at Sight
Time or Date Letters of Credit
A Typical Letter of Credit
Transaction
Tips on using a Letter of Credit
Collections
Pricing
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 which the market is willing to pay.
There are three common methods of pricing exports:
- 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 add
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 mark-up 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.
In addition, consider your company's objectives, the price sensitivity
and uniqueness of your product. A Price Determination Worksheet has
been included in Appendix G in order to aid you in calculating the
proper export price of your product.
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Quotation
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 foreign port.
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 H 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 B 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
www.iccwbo.org/index.asp
and other sources. The following are descriptions of some of the
most common terms and definitions used in international trade:
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.
C.I.F. (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 or aircraft.
F.O.B. (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 insurance.
F.A.S. (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 buyer.
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.
Using Terms of Sale in
a Quotation
When quoting a price, the exporter should make it meaningful
to the prospective buyer. For example, a price for industrial machinery
quoted "F.O.B. 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 C.I.F. whenever possible
because it is easily understood by your prospective customer. A
freight forwarder can help you determine a C.I.F. price. However,
some countries will not permit quotes in C.I.F.
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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 market.
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.
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 date is fixed by the terms
of the LC.
When deciding whether to use a LC, consider the
additional cost of bank confirmation and related fees. A typical
LC can cost $200-$300, including your bank's examination fee, which
can range from 1/10 to 1/4 percent. 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.
Documentary Drafts.
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
payment.
Time or Date Letter of Credit:
The terms of the letter of credit do not require payment until a
future date.
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 towards 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
funds.
- 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
documents.
- 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.
- 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
importer.
- 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 the
F.O.B. costs plus all shipping expenses you want the bank to repay
(inland and ocean 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
option."
- 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
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, cost-effective
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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