A Reference Guide to Trade Finance TechniquesBenefits
Where used, Incoterms clearly identify which
party is responsible for the goods at each
stage of the shipping process. Because
Incoterms are widely accepted throughout the
world, they can be used for the overwhelming
majority of trades. As international standards
they can also be transmitted electronically
using EDI, as long as both parties agree,
reducing the cost of preparing and using
paper documentation.
Potential problems
As with most internationally agreed
standards, there are some circumstances
which are not covered by Incoterms. In
addition, both importer and exporter should
ensure Incoterms are recognised in the
counterparty’s country, as the terms are
not recognised in some locations. Even
in situations or locations not covered by
Incoterms, they can still be used, although
there is scope for confusion between the
parties over the division of responsibilities.
Moreover, disputes may be difficult to resolve
in court, should the need arise. In these
circumstances both parties may benefit from
arranging their own additional insurance to
cover their positions.
There are additional costs which are not
covered by Incoterms. Depending on the
term used, this might include the cost of
insuring the goods and the cost of shipping
goods from the factory to the shipper, or
from the port to the importer’s warehouse.
Both parties need to consider these
additional costs when, in the case of the
exporter, setting the price or, in the case of
the importer, agreeing the contract.
Assessment
Incoterms ease the process of agreeing the
detail of a contract to supply a consignment
of goods, by identifying clearly which party
is responsible for each stage of the shipping
process. Although some Incoterms make
clear which party is responsible for the
goods at every stage, there is not always
a requirement for that party to arrange
insurance. Both parties should therefore
consider arranging their own insurance for
the whole process.
Insurance
Trade, especially international trade, exposes
both exporter and importer to a range of
risks, all of which need to be understood and,
possibly, managed.
There are essentially three risks: that
the goods will be damaged or lost in transit;
that there will be an economic, political or
regulatory change (new exchange controls or
import licence requirements, for example) in
the other country (country risk) which results
in loss to one or other party; and that the
counterparty to the transaction will fail.
The risk of loss or damage in transit can be
managed by arranging some form of transit
insurance. Both parties may want to consider
arranging their own insurance against this
loss, as the effect of any consequent loss
will be different for the exporter and importer.
The exporter will have to accept an impact on
cash flow (except in the case of payment in
advance). The importer may have to cut back
on production whilst an alternative source of
supply is found.
The risk of loss from country risk is more
complex, as it requires an assessment
of the likelihood of the counterparty’s
government imposing new trade restrictions
(such as exchange controls or import
restrictions). It is possible to arrange
insurance to protect against loss caused by
regulatory change from both export credit
agencies and private insurers.
The risk of loss as a result of counterparty
failure varies according to the payment
terms used. Under open account terms,
much of the risk is faced by the exporter.
The importer’s creditworthiness is central
to the risk of the transaction. Chief of this
is the risk that the importer will receive the
goods but either will not pay, will not pay in
full, or pays late (possibly incurring costs for
the exporter’s accounts receivable team).
If the importer fails before title of the goods
is exchanged, the exporter’s position is
stronger, but only if an alternative customer
can be found. This depends in part on the
lifetime of the goods being sufficient for that
to happen (difficult with certain items, such
as perishable foods) and on there being
alternative customers (difficult in highly
specialised industries). The exporter of a