Chapter 6 The use of documents in trade
Documents used in open
account tradingThere are a number of specific documents
that are used in all forms of trading, including
open account trading.
The challenge for the seller under open
account terms is to manage the two core
risks. First, there is the risk that the buyer
does not pay, either as a result of insolvency
or refusal (credit risk), or is prevented from
paying, as a result of exchange controls
or other regulation (country risk). Second,
there is the risk that the goods are damaged
in transit.
The first stage for the seller under open
account terms is to find out as much as
possible about their counterparty, both
from its own trading records (if these exist)
and from specialist credit risk agencies, if
available. Country risk can be evaluated
using information from banks, accountancy
firms and other specialist agencies.
The second stage is to ensure there is
appropriate documentation in place for each
transaction to provide evidence of the trade,
should it be necessary to pursue redress
through the courts. This will require accurate
invoices and bills of lading, for example, to be
provided.
The final stage is to consider arranging
appropriate insurance to cover both credit
and country risk, as well as any transit risk.Invoice
An invoice is the core document in any
transaction, as it is often the only document
that represents the contract between the
buyer and the seller. Technically an invoice
is a formal request from the seller asking the
buyer to pay a specified amount in exchange
for the items or service listed on the invoice.
This applies whether it refers to a domestic or
an international trade.Core characteristics
All invoices should include a range of detail
about the transaction. At the very least,
there should be a description of the goods or
service and the amount payable by the buyer.
(This should be denominated in the currency
of the transaction.) There should also be
a date and other appropriate referenceinformation, as well as the names and
addresses of the buyer and seller.
Details of the shipping arrangements
(including, sometimes, the cost) are often
included on the invoice. If so, the detail
should match that provided in any waybill or
bill of lading. The invoice should also detail
any relevant tax information for customs
clearance or tax reclamation purposes.
(In the EU, this will be a VAT number.)
In some industries and sales relationships
it is acceptable for invoices to be prepared
electronically. There are significant
potential cost and control advantages to
using electronic invoicing, especially when
integrated with electronic bill payment.Special invoices
When selling to countries which impose
exchange controls, it may be necessary for
the exporter to produce a pro-forma invoice
before a sale is agreed. This is because the
importer may only be able to get approval for
a foreign currency transaction on production
of a request to pay.
Where a country imposes anti-dumping
controls, an exporter may have to arrange
for pre-approval of the invoice where a
consular official (from the importer’s country)
approves an invoice prior to the agreement
of the sale. An invoice signed by a consular
official is known as a legalised invoice.
Some countries prepare their own forms
authorising imports which are also available
from consulates. These are similarly
countersigned by a consular official, and are
known as consular invoices.Benefits
The invoice is clear evidence of a sale.
As such, it is possible for the exporter
to arrange working capital finance by
discounting the invoices either with a bank
or with a special invoice discounter (see
next chapter).
The invoice is also a critical trade
document, as it provides clear
identification of the traded goods along
with the price of sale. The production of
an invoice is a core requirement for any
goods to pass through customs in the
destination country.
As discussed above, an invoice may also