INCO TERMS

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 INTERNATIONAL COMMERCIAL TERMS

• A codification of international rules for the

uniform interpretation of common contract
clauses in export/import transactions
developed and issued by the International
Chamber of Commerce (ICC).
• It defines trade contract responsibilities
between buyer and seller

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 EX WORKS
• Means that the seller fulfills his obligation to deliver when he
has made the goods available at his premises (i.e. works,
factory, warehouse, etc.) to the buyer
• He is not responsible for loading the goods on the vehicle
provided by the buyer or for clearing the goods for export,
unless otherwise agreed
• The buyer bears all costs and risks involved in taking the
goods from the seller's premises to the desired destination.
• This term thus represents the minimum obligation for the
seller

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 FREE CARRIER (forwarder)
• "Free Carrier" means that the seller fulfills his obligation to
deliver when he has handed over the goods, cleared for
export, into the charge of the carrier named by the buyer at
the named place or point.
• This term may be used for any mode of transport, including
multimodal transport.

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 FREE ALONGSIDE SHIP - FAS
• "Free Alongside Ship" means that the seller fulfills his
obligation to deliver when the goods have been
placed alongside the vessel on the quay at the
named port of shipment
• This means that the buyer has to bear all costs and
risks of loss of or damage to the goods from that
moment.

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 FREE ON BOARD- FOB
• "Free on Board" means that the seller fulfills his obligation to
deliver when the goods have passed over the ship's rail at the
named port of shipment
• This means that the buyer has to bear all costs and risks of
loss of or damage to the goods from that point.
• The FOB term requires the seller to clear the goods for export

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• CFR - COST AND FREIGHT (... named port of
destination)
- Means that the seller must pay the costs and freight necessary
to bring the goods to the named port of destination

• CIF - COST, INSURANCE AND FREIGHT (...

named port of destination )
- Means that the seller has the same obligations as under CFR but
with the addition that he has to procure marine insurance against
the buyer's risk of loss of or damage to the goods during the
carriage.

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• CPT - CARRIAGE PAID TO (... named place of
destination)
- Means that the seller pays the freight for the carriage of the goods
to the named destination
- Prepaid vs. Collect

• CIP - CARRIAGE AND INSURANCE PAID TO (... named

place of destination)
- Means that the seller has the same obligations as under CPT
but with the addition that the seller has to procure cargo
insurance against the buyer's risk of loss of or damage to the
goods during the carriage.

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• DAF - DELIVERED AT FRONTIER (... named
place)
- Means that the seller fulfills his obligation to deliver when the
goods have been made available, cleared for export, at the
named point and place at the frontier, but before the customs
border of the adjoining country

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 DES - DELIVERED EX SHIP
• Means that the seller fulfills his obligation to deliver when
the goods have been made available to the buyer on board
• The ship has cleared the border but uncleared for import at
the named port of destination.
• The seller has to bear all the costs and risks involved in
bringing the goods to the named port of destination

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 DEQ - DELIVERED EX QUAY
• Means that the seller fulfills his obligation to deliver when
he has made the goods available to the buyer on the quay
(wharf) at the named port of destination, cleared for
importation
• The seller has to bear all risks and costs including duties,
taxes and other charges of delivering the goods thereto.
• This term can only be used for sea or inland waterway
transport.

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 DDU - DELIVERED DUTY UNPAID
• Means that the seller fulfills his obligation to deliver
when the goods have been made available at the named
place in the country of importation.
• The seller has to bear the costs and risks involved in
bringing the goods thereto (excluding duties, taxes and
other official charges payable upon importation) as well
as the costs and risks of carrying out customs formalities.
• The buyer has to pay any additional costs and to bear any
risks caused by his failure to clear the goods for import in
time.
• This term may be used irrespective of the mode of
transport.

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 DDP - DELIVERED DUTY PAID
• means that the seller fulfills his obligation to deliver
when the goods have been made available at the named
place in the country of importation.
• The seller has to bear the risks and costs, including
duties, taxes and other charges of delivering the goods
thereto, cleared for importation.
• This term may be used irrespective of the mode of
transport.
• EX WORKS REPRESENT LEAST BURDEN ON SELLER
WHEREAS DDP REPRESENTS MAXIMUM OBLIGATION

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 FAS loading FOB
FCA
Bill of
Lading

Factory Ex-works

Customs
+ CFR

Bringing goods to the

DDU named destination Export
without custom DDP clearance
clearance

unloading DAF – before the +

DES customs border

CIF

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DEQ Insurance
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 COMMON PAYMENT TERMS

• Cash in Advance

• Letter of Credit

• Documents against Payment/DA

• Open Account

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 CASH IN ADVANCE
Receive cash from the buyer before shipping
•Telegraphic Transfer

• Demand Draft

*In case of HUGE payments (importer may demand

a bank guarantee)

**if exporter is in a strong trading position &

particular product is not available
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 Parties to a Letter of Credit
Applicant/Importer
• Importer is the “Opener” on whose behalf
or account, the letter of credit is issued by
his bank (Issuing Bank)
Exporter
• Exporter is the “Beneficiary” of the letter of
credit who is entitled to receive the
payment of his bills according to the terms
of Letter of Credit.
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 Parties to a Letter of Credit
Intermediary Bank/Confirming Bank
 Usually a branch or the correspondent of the
opening bank in the exporting country
 Advising or Notifying Bank  merely forwards the
credit, without any obligation on its part
 Confirming Bank  adds its own undertakings to
the credit while advising it to the beneficiary

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 LETTER OF CREDIT

In short, an L/C is…

 A formal document of payment

 Opened by a party wishing to import

 Communicated through banking channels

 Paid by the opening bank within a specified

timeframe upon presentation of docs

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 LETTER OF CREDIT
Documentary Credit Cycle

(1) Contract IMPORTER -

EXPORTER-
BUYER
SELLER
(5) Shipment
(APPLICANT)
(BENEFICIARY)

(4) Advising (6) Documents (2) Application

for negotiation
(8)
Retirement

(9) Remit the

payment
EXPORTER’S BANK
(NEGOTIATING/ IMPORTER’S BANK
(3) L/C
CONFIRMING BANK) (L/C ISSUING BANK)
(7) Dispatch of Documents
- Claim Reimbursement

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 L/C PAYMENT PROCEDURE
• Buyer and Seller agrees on terms and conditions of the sale

• Buyer instructs its bank to open an L/C incorporating previously agreed terms of sale

• The buyer's bank prepares a Letter of Credit (L/C), including all instructions to the seller's bank concerning
the shipment and sends the L/C to the seller's bank, requesting confirmation
• The seller may request confirmation from a confirming bank for added security
• The Seller's bank prepares a letter of confirmation to forward to the seller along with the L/C
• The seller reviews carefully all conditions in the L/C, specially shipment schedule in consultation with his
freight forwarder
• The seller arranges the goods and hand over to freight forwarder for delivery at appropriate port or airport
• Once goods are loaded/shipped, the forwarder completes necessary documentation and hand them over to
the seller.
• The seller then presents the documents to his bank, informing full compliance with terms and conditions of
L/C
• The seller's bank reviews the documents.
• The documents are airmailed to the buyer's bank for review and passing necessary documents to buyer.
• The buyer's bank sends the draft to buyer for payment/acceptance
• Buyer pays bank/sends acceptance
• The buyer gets the documents needed to claim the goods.
• The seller's bank gets payment and pays seller immediately or at a later date

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L/C PAYMENT PROCEDURE

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L/C PAYMENT PROCEDURE

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L/C PAYMENT PROCEDURE

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L/C PAYMENT PROCEDURE

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L/C PAYMENT PROCEDURE

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 Types of letters of credit
a. SIGHT L/C
b. USANCE L/C
c. REVOCABLE L/C
d. IRREVOCABLE L/C
e. CONFIRMED IRREVOCABLE L/C
f. UNCONFIRMED IRREVOCABLE L/C
g. WITH & WITHOUT RECOURSE L/C
h. BACK TO BACK L/C
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 Types of letters of credit
i. TRANSFERABLE L/C
j. ANTICIPATORY L/C – RED CLAUSE, GREEN CLAUSE
k. REVOLVING L/C
l. DEFERRED PAYMENT L/C
m. TRANSIT L/C
n. RESTRICTED & UNRESTRICTED L/C
o. NEGOTIABLE L/C

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 Sight L/C (L/C at Sight)
 Involves payment to exporter against Sight Draft

Usance L/C
 Payment is made against Usance Draft

 Usance Draft is jointly accepted by Issuing Bank and

Importer which can be discounted through any
commercial bank before due date
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 Revocable L/C
 can be amended/cancelled by the issuing bank
w/o the consent of the beneficiary, often at the
request and on the instructions of the applicant.
 NO security of payment

 Does not constitute a legally binding

undertaking/limited utility/not much in use

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 Irrevocable Letters of Credit
 It constitutes a legally binding undertaking of the
issuing bank for the payment bills drawn under the
credit, PROVIDED the beneficiary presents the
stipulated documents to the credit nominated bank or
to the issuing bank and complies with all the
conditions of the credit
 CAN’T be modified OR cancelled w/o approval of the
beneficiary, therefore, widely accepted
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 Confirmed Irrevocable L/C
opened by the issuing bank whose
authenticity has been confirmed by the
advising bank
+
the advising bank adds its confirmation to the
credit

*Exporter’s payment is confirmed even if

the importer or the issuing bank defaults.
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 Unconfirmed Irrevocable L/C

opened by an issuing bank in which the advising

bank does not add its confirmation to the credit
The promise to pay comes from the issuing bank
only, UNLIKE in a confirmed irrevocable L/C where
both issuing & advising bank promise to pay the
beneficiary.

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 With Recourse L/C
 If the buyer fails to pay the bank after the
specified period, the bank can have
recourse on the exporter

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 Without Recourse L/C
• the bank has NO recourse on the exporter, IF the
buyer fails to pay the bank after the specified
period
• THE BEST L/C CONFIRMED IRREVOCABLE
WITHOUT RECOURSE L/C because in this case the
Indian bank has added obligation to pay

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 Back to Back L/C
the exporter uses his L/C as a cover for
opening an L/C in favour of the local
suppliers
It’s preferred over Transferable L/C to
maintain secrecy of the identity of
ultimate buyer

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 Transferable L/C
 In this the beneficiary is entitled to request the
paying, accepting, negotiating bank to pay, accept,
negotiate bills tendered by one or more OTHER
PARTIES. E.g. LI & FUNG
 For partial transfer to one SECOND BENEFICIARY
or more than one second beneficiaries, the credit
must permit partial shipment

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 Anticipatory L/C
 This credit provides for advance payment, or at
least part payment to the beneficiary against his
undertaking to effect the shipment and submit the
bill and/or documents in terms of credit within the
validity
 Ultimate liability lies with the applicant (buyer)

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Anticipatory L/C - Red Clause

 Since the clause is printed /typed usually in red

ink, it’s called “Red Clause” credits.

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 Green Clause L/C
 The “Green Clause” is an extension of the “Red
Clause’
 it envisages the credit given to the exporter to
cover the period of storage of goods at the sea
port

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 Revolving Letters of Credit
 In revolving L/C, the amount involved when
utilized is reinstated, without issuing another L/C
and usually under the same terms and
conditions.
 It can be revocable / irrevocable and may be
revolving in relation to time or value within a
given overall period of validity.

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 Deferred Payment L/C
 the exporter supplies plant, machineries, capital
goods, etc.
 Importer pays in installments over a period
ranging from 1 to 7 years or even more
 no draft is drawn, payment by the opening bank
is determined in accordance with the terms laid
down in the credit

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 Transit L/C
 It is issued in one country with the beneficiary in
another country but is advised through and
usually confirmed by a bank in London

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 Restricted & Unrestricted L/C

 If no specific bank is designated to pay, accept or

negotiate, the credit is termed as unrestricted or
open or general credits
 if a specified bank is designated to pay, accept or
negotiate, the credit is termed as restricted or
special

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 Negotiable L/C
 Issuing Bank authorises the Negotiating Bank to
honour the drafts drawn under the terms of credit
 Exporter submits docs to his bank

 Negotiating bank examines docs  1)sends docs

to issuing bank 2)pays the exporter even before
issuing bank sees the docs**

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 Negotiable L/C

 ** if Issuing Bank doesn’t pay, exporter will have

to REFUND the payment
 L/C states that payment is allowed by
negotiation
 Name of bank may or may not be stated

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 Contents of L/C
 Be Sure to Verify:

Correct name and address of the exporter

Correct name and address of the importer

Type of L/C

Amount of L/C

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 Contents of L/C
How credit shall be available e.g. by sight
payment, deferred payment, acceptance or
negotiation

Name of drawee of the draft and tenor of the

draft

Description of goods, quantity or items and the

unit price

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 Contents of L/C
List of documents required to be submitted by
the beneficiary

Whether docs required are obtainable and

according to terms of sale

Port of discharge and the place of final

destination

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 CONTENTS OF L/C
Terms of delivery i.e. FOB, CFR, CIF, etc.

Status of transshipment, allowed or not

Status of partial shipment, allowed or not

Last date of sending shipment

Time period for presentation of docs for

negotiation by exporter after dispatch of goods

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 CONTENTS OF L/C

Date and place of expiry of L/C

Transfer of L/C allowed or not

Mode of advice of L/C i.e. by mail or tele-

transmission

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 Guidelines for the Beneficiary when
reviewing the L/C
Consult banker to validate L/C
Terms & conditions in L/C should be as per export
contract
Docs required can be obtained and presented
Last date of shipment and time allowed for
presentation of docs is feasible

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 Document Collection

- DOCUMENT AGAINST PAYMENT

- DOCUMENT AGAINST ACCEPTANCE

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 Documents against Payment
1) The exporter makes shipment and sends the
shipment

2) Exporter sends shipping documents to the

his/her bank for collection

3) The exporter's bank sends the shipping

documents along with a COLLECTION LETTER to
the importer's bank

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 Documents against Payment
4) The importer’s bank sends a COLLECTION
NOTICE to the importer.

5) The importer makes payment upon receiving the

collection notice

6) The importer’s bank receives payment, hands

over the original shipping documents

7) Importer takes physical possession of goods

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 Documents against Acceptance

 Everything is the same as DP except….

 When the importer’s bank sends a COLLECTION

NOTICE to the importer, the importer gives the
‘ACCEPTANCE’ to pay at a later date I/O making
payment upon receiving the collection notice

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 Risks under D/P and D/A??

LIQUIDITY CRUNCH
exchange control undertaking - realise export
proceeds within a period of 6 months or due date

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The possible options:

Re-negotiate with importer, offer discount

Bring the goods back to India
Look for an alternate importer in the same
country or in another country
Go to importing country, sell goods locally
Abandon the goods

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Precautions :
Obtain credit report on the importer through
bank
Consign goods to the importer’s bank I/O the
importer
Should obtain Credit Risk Insurance Policy

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 OPEN ACCOUNT

Ship the goods

forward the shipping docs directly to buyer

await payment ……

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RISK vs. TERMS of PAYMENT

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 Comparison of Various Methods of
Payment
Goods
Usual Time Risk to Risk to
Method Available
of Payment Exporter Importer
to Buyer
Cash In After Before Very Low Maximum-Relies
Advance Payment Shipment on exporter to
ship goods as
ordered
Letter of After When Very Low Assured of
Credit Payment documents quantity and also
Confirmed are available quality at
at shipment shipment if
Unconfirmed inspection report
(Advised) is required

Documentary After On If draft unpaid, Assured of

Collection Payment presentation goods must quantity, also
Sight Draft of draft to be returned or quality, if goods
Documents importer disposed of, are inspected
against usually at loss before shipment
Payment

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 Comparison of Various Methods of
Payment
Goods
Usual Time Risk To Risk To
Method Available To
Of Payment Exporter Importer
Buyer
Documentary Before payment On maturity of Relies on importer Minimal—Can check
Collection Time Draft draft to pay draft shipment for
Documents against quantity and quality
Acceptance before payment
Consignment Before payment, After use; Substantial risk Very Low
exporter retains inventory and unless through
title until goods warehousing cost foreign branch or
are sold or used to exporter subsidiary
Open Account Before payment As agreed Relies on importer Very Low
to pay as agreed -
complete risk

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