Top Shipping And Payment Terms (INCOTERMS) In International Trade

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Payment Terms

Shipping and payment terms also known as Payment terms (INCOTERMS), are crucial when transporting goods internationally.

EXW, FAS, CFR, and CIF are just gibberish for an untrained ear, but for international shippers, it’s totally a different story. 

Remembering the meanings of numerous abbreviations can be tricky. To overcome this challenge, here’s a blog to refer to whenever your memory fails you.

Shipping Terms:

Some of the latest shipping terms in international trade are:

EXW: (Ex Works)

  • In this term, the seller is responsible for having all the goods available at his premises or factory.
  • And the buyer is responsible for all transportation, insurance costs, and risks from the seller’s premises to the destination.

FAS: ( Free Alongside Ship)

  • In this term, the Delivery and loading of the goods are completed at the prearranged departure port by the seller.
  • And after this point, the buyer bears all the risks and costs of customs clearance and import duties. 

CFR (Cost and Freight):

CRF is only used for goods that are transported by sea.  The buyer has little control over the shipping process and its associated costs.

  • The seller arranged and paid the costs to bring the goods to the agreed port of the destination. The seller then ensures that the goods are loaded onto the ship once they have been cleared for export.
  • When the goods are loaded onto the board, all responsibilities, including the insurance of goods and the main transport costs to the port, are handed to the buyer.

CIF: (Cost, Insurance and Freight)

CIF and CFR are similar, with the additional responsibility in CIF for sellers being marine insurance loss or damage to the goods during the shipment process.

FCA: (Free Carrier)

  • The responsibility of the seller is to hand over the goods to the carrier designated by the buyer at the named place.
  • And from that point onward the buyer takes charge of the transportation and also assumes responsibility for costs and associated risks with the goods’s transportation.

FOB “Port name” (Free On Board):

  • The seller pays for the transportation and loading of goods on the vessel at the named port of shipment.
  • Once the goods are on board then the responsibility shifts from the seller to the buyer. Now the buyer pays all the remaining costs.

CPT: (Carriage Paid To)

The seller delivers the goods to a carrier or to another person and pays the freight charges to transport the goods to the specified destination, at a place mutually agreed upon by the buyer and seller.

CIP: (Carriage and Insurance Paid To)

CIP is similar to CPT, with the added responsibility for the seller to provide insurance coverage for potential loss or damage to the goods during carriage.

DDU: (Delivered Duty Unpaid)

  • In this term the seller is responsible for ensuring goods arrive safely at the named destination. 
  • However, the clearance of goods and taxes are the buyer’s responsibility.

DEQ: (Delivered Ex Quay, [Duty Paid])

When the seller provides the goods to the buyer at the designated port of destination, cleared for importation, he is fulfilling his obligation to deliver the goods. All the risks and costs such as duties, taxes, and other charges of delivering the goods to the destination are the responsibility of the seller.

Payment Terms:

Letter Of Credit (L/C): 

A letter issued by a bank, authorizing the bearer (usually the seller) to draw a specified amount of money. This can be drawn from the issuing bank, branches, or associated banks or agencies. The risks are essentially shifted from the buyer to the bank. And on the successful completion of the risk of delivering goods, the seller receives the payment by L/C. The Payment terms (INCOTERMS) associated with this Letter of Credit define the distribution of risks and responsibilities in international trade transactions.

Cash In Advance:

It is the upfront cash to the seller to perform shipment. The seller could be paid in full or in part before the goods are shipped. When choosing this payment method, it is advisable to exercise caution, particularly if the buyer and seller do not have a well-established, long-standing relationship.

Telegraphic Transfer (T/T):

Telegraphic Transfer (T/T) refers to the electronic transfer of funds by banks.

Open Account:

This method is an unpaid credit order and requires a high level of trust between buyer and seller. In this method, the seller relies on the buyers to make the payment according to the shipping and payment terms (INCOTERMS) agreement.

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