A Reference Guide to Trade Finance Techniques- Parties agree contract of sale.
As far as possible, the details of the
contract of sale should be negotiated to
cover all possible circumstances. This
should minimise the risk of problems at a
later date.
The contract terms and conditions
should include a description of the goods,
the price (including currency) and the
payment terms (whether the documents
will be exchanged for payment or an
accepted bill). Both parties will also need
to address how to meet any export/import
controls, including the procurement of
any licences and the compliance with any
exchange controls.
The details of the delivery of the goods
should also be agreed. Factors to agree
include the timing of the delivery of the
goods, the means of transport to be used,
the point of delivery, insurance, and the
use of a specific Incoterm. Agreement
should also be reached on what should
happen in the event of delays in shipping,
or at the customs points.
Both parties should also consider
clauses to protect their specific interests.
For the seller these will concentrate on
the situation in the event of non-payment
or non-acceptance and will include points
such as the retention of title and the
process of protesting an unpaid accepted
bill of exchange. (Protesting is the legal
process involving the presentation of the
bill for payment, normally through a notary
public or other legal party.) For the buyer,
these will concentrate on the situation
in the event of damaged or substandard
goods being provided. In both cases,
specialist legal advice will be needed.
Finally, the two parties must confirm
which documents should be required to
be exchanged under the terms of the
collection itself.
The final agreement should comply
with the Uniform Rules for Collections
(published by the International Chamber of
Commerce). - Seller ships goods to buyer.
This should be in accordance with the
terms agreed in the contract. Appropriate
insurance should also be arranged.
3. Seller sends collection documents to its
bank.
The seller should send all the documents
required to collect payment under the
terms of the agreement to its bank (the
remitting bank). The seller will want to
ensure there are no inconsistencies in
the documentation, as this can delay or
prevent payment being made. Common
discrepancies include differences in
the description of goods being used on
different documents and in the dates
used. Care should also be taken over the
payment terms offered, as the buyer’s
bank will use those stated in the collection
documents to collect payment.
4. Seller’s bank sends documents on to
buyer’s bank.
The seller’s bank will check the documents
provided against those required in the
collection schedule, and then send them
on to the buyer’s bank (the presenting or
collecting bank). The banks do not usually
check the detail of the documents, rather
they check the presence of documents
as outlined in the seller’s instructions and
schedule of documents.
This has historically been a paper
process, although it is increasingly
common for documents to be prepared and
presented electronically. The process used
should be agreed as part of the contract,
although it is usually the exporter’s decision
to take. In some cases the seller will
forward the documents direct to the buyer’s
bank (with a copy to the seller’s bank). This
is known as a direct documentary collection.
5. Documents presented to buyer by its bank.
Once it has received these from the
seller’s bank, the buyer’s bank will advise
the buyer of the details. Under the terms
of a documentary collection, the buyer’s
bank’s responsibility is to ensure the
documents are only released to the buyer
when the buyer meets its obligations as
described in the collection documents.
6. Buyer pays or accepts bill.
Under the terms of the collection
documents, the buyer will be required to
either settle the transaction immediately,
by paying cash, or accept a bill of