Settlement of trade transactions and the role of shipping documents
A particular aspect of the application of shipping documents is their use in calculations for transactions in international trade.
Such calculations can be performed in various forms. The simplest forms are prepayment and payment to an open account. In the case of prepayment, the buyer is obligated to pay the contract in advance, transferring money to the seller's account before shipment of the goods. This type of payment fully insures the seller against non-payment of the transaction, but the risks of the buyer (non-delivery of goods or delivery of defective goods) are maximum. Prepayment is applied in cases where the buyer is confident in the good faith of the seller.
If you use the open account the seller ships the goods to the buyer without payment, including the amount of debt in the debit of the account opened by him in the name of the buyer, who must pay the debt within the agreed time. This form is a type of commercial loan and is used in calculations between permanent counterparties: firms and their affiliates, with commission sales of goods in the form of consignments or with multiple deliveries of a homogeneous product.
Applying a prepayment and an open account - conditions that are sometimes called "trusted" - objectively puts one of the parties in an extremely unfavorable and risky position. Therefore, in the international trade so-called documentary forms of payment - collection and letter of credit, in which the bikes of the seller and the buyer take part, are more common, and the payment is caused by the transfer of a set of documents.
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When using the collection form, the seller's bank sends a set of necessary documents (invoice, certificates, shipping documents, etc.) to the buyer's bank, and the latter, in turn, transfers this kit to the buyer against payment by the buyer of the transaction. At the same time, the bank is not responsible for the conformity of the documents transmitted to the terms of the supply contract, nor for the payment by the buyer. He executes orders of the buyer for transferring to him the documents received from the seller and transferring a certain amount from the buyer's funds to the seller's bank. If the buyer becomes insolvent or refuses to pay, the bank will simply return the set of documents to the seller, who will thus retain control of the goods.
More reliable for the seller and widespread in international trade is a form of payment using the so-called documentary credit (Documentary Letter of Credit).
Letter of credit - is a bank's obligation to pay, at the direction of the buyer and at his expense, the seller against documents presented by the seller. This form of payment involves replacing the conscientiousness and credit of the buyer with the conscientiousness and credit of the bank. The scheme of payment with the help of a letter of credit is simplified as follows:
After the conclusion of the contract of sale, the buyer will instruct his bank to open a letter of credit in favor of the seller. The buyer's bank opens a letter of credit and informs the seller's bank about it.
After completing the shipment of goods in accordance with the contract of sale, the seller presents the documents provided by the letter of credit to his bank, which checks the documents and, if they comply with the terms of the letter of credit, makes a payment. Documents for receiving goods are sent to the buyer through his bank.
The letter of credit presupposes the financial obligation of the bank that opened the letter of credit to pay the amount due to the seller against the delivery of a set of shipping documents to the seller, issued in accordance with the terms of the letter of credit (which, in turn, comply with the terms of the contract of sale). Thus, the bank takes on the risk of possible insolvency of the buyer.
However, before paying the money under the letter of credit, the bank makes a meticulous check of the documents submitted by the seller for compliance with the terms of the letter of credit and each other. At the same time, specialists of banks are guided by the provisions of the document of the International Chamber of Commerce "Unified Rules and Customs for Documentary Credits 11SR", the next version of which (11SR-600 or, in the United States version, UPDL-600) was published in 2007.
In accordance with the UCP, banks operate only on the basis of the terms of letters of credit. The discrepancies in the documents may lead to denial of payment. In this case, it does not matter that the buyer may have already received the goods and, in turn, sold it. Here is not a complete list of the reasons for refusing banks to pay by letter of credit related to transport documents:
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- the seller presents a document other than that indicated in the credit, type (for example, waybill instead of a bill of lading);
- the date of issue of the transport document does not correspond to the time of shipment provided for by the letter of credit;
- the point of issue of the transport document does not correspond to the point of shipment provided by the contract of sale;
- the description of the goods in the contract of sale does not correspond to the description of the goods in the transport document;
- the bill of lading, submitted by the seller, has reservations about the state of the goods (if the letter of credit does not specify the possibility of certain reservations about the state of the goods or packaging, by default, the condition of the letter of credit is to provide a "clean" transport document);
- the bill of lading does not have a freight bill or that it will be paid at the destination point;
- the seller is presented with a loading bill of lading, while the letter of credit provides for the provision of an on-board bill of lading;
- a letter of credit provides for the delivery of one indivisible shipment (one transport document), but in fact the delivery is made by several shipments;
- the seller has allowed the carrier to place cargo on the deck of the ship, whereas the L/C excludes such possibility, etc.
It should be noted that the occurrence of the above and other inconsistencies may be due not only to technical errors, but also to the fact that the preparation of a sales contract, including agreement with the buyer of the conditions of the letter of credit, units of the seller company that do not exchange information with each other. It is also often the situation when the freight forwarder, to whom the seller ordered the organization of the delivery of the goods, does not provide information on the terms of the letter of credit on the pretext of protecting trade secrets, and, acting in good faith for the benefit of the client, receives from the carrier "incorrect" transport documents.
These circumstances require special attention to the processing of transport documents for foreign trade transactions, paid with the use of documentary letters of credit.
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