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Trading
Terms & Abbreviations:
List of Trading terms and widely used
abbreviations along with a brief description on the forms of payments and
bank instruments used in trade with the different types of Letters of
Credit, along with an example of the mechanics of how the LC works.
ASWP – Any Safe World Port.
TBD – To Be Determined.
T/T – Telegraphic Transfer.
C/O – Certificate of Origin.
BCL – Bank Comfort Letter.
Also known as a Bank Capability Letter, or Bank Confirmation Letter,
this is a letter from the Buyer's bank confirming solvency and the financial capacity of the buyer to meet the payment requirements. This letter states that the
Buyer has sufficient funds to cover the cost of the order. It should
however be understood that this does not imply any guarantee of payment.
BOL or B/L – Bill of Landing.
This is the receipt given by the shipping company when goods are loaded on
board the vessel. This is an important document and gives title to the
goods. It is needed by the buyer to obtain the goods from the port.
DC – Draft Contract.
A draft contract is an initial contract, which is drawn up and sent from
the Seller to the Buyer. The Buyer has the opportunity to make amendments
and send it back to the Seller for consideration. This process continues
until both parties are satisfied with the terms of the contract.
SCO – Soft Corporate Offer.
Issued by the seller or seller mandate is the preliminary stages of
negotiation.
FCO – Full Corporate Offer.
Issued by the seller after the preliminary stages of negotiation are
complete, such as a letter of intent having been issued by the buyer, and
a soft probe having been conducted on their accounts by the Seller. A full
corporate offer is a document, which outlines the conditions of the sale.
ICPO
– Irrevocable Corporate Purchase Order.
This is a document drawn up by commercial Buyers, and contains the
quantities and type of commodity required, and other conditions that that
the buyer would like the sale to proceed under. Once submitted to the
Seller, this is deemed to be binding and the corporation is obliged to
complete the sale.
L/C or LOC – Letter of Credit.
A letter of credit is a document issued from the Buyer's bank to the
Seller, which guarantees payment to the beneficiary of the letter of
credit (the Seller), as long as the terms and conditions set out in the
letter of credit are met. L/C is almost always irrevocable, can be
transferable, for regular shipments a Revolving L/C is often utilized.
TLC – Transferable letter of credit.
This is the favourite instrument of the traders and middlemen to offer
secure terms of payments to third parties such as their suppliers (second
beneficiary in the letter of credit). When the buyer pays the letter of
credit, part of the proceeds is transferred to second beneficiary.
LOI – Letter of Intent.
Letter of intent is a document issued from the Buyer to the Seller, which
indicates that the Buyer would like to enter into negotiations with the
Seller in the hope of purchasing commodity. The letter of intent is a formal request and is not
legally binding, but it does provide a starting point for negotiations.
PB – Performance Bond.
This is a type of bank guarantee, which is issued from the Seller to the
Buyer. It guarantees that the Seller will meet the terms of the contract.
Normally issued in the amount of 2 % of the total amount of the contract,
a performance bond can be drawn upon by the Buyer in the event that the
Seller breaks the contract and fails to provide the product, which was
stipulated in the contract.
POP – Proof of Product. A Proof of Product
('POP')
Is often requested by customers or agents who believe it will give them
some guarantee of the existence of the product and ability of the supplier
to deliver the product. In practice many POP’s are false. POP offers no
proof at all, because once a POP has been drafted it is automatically out
of date – the product could have been sold to another buyer and
therefore no longer exists. Nevertheless, a POP is still occasionally
requested as apparent proof that a seller has the product. A POP is
realistically provided only when the Buyer's bank issues a Bank
Confirmation Letter (BCL) to the Seller and or seller's bank via SWIFT.
Then the Seller's bank can check the availability of funds in the Buyer's
bank and issue a POP to the Buyer's bank within an agreed time period
(e.g. 5 days). A seller will not issue a POP to buyer without a
non-operative letter of credit opened. The (PB) of 2 % will render the DLS
operative. The bank will then send the POP five days later.
POF
– Proof of Funds.
A proof of funds for transaction.
RWA – Ready, Willing and Able.
This is a document, which is issued by the Buyer's bank. The bank confirms
that their client has the sufficient funds in their possession and is
ready, willing and able to engage in the contract.
SGS INSPECTION http://www.sgs.com
Is the world's leading inspection, verification, testing and
Certification Company? SGS is recognized as the global benchmark for
quality and integrity. The core services offered by SGS can be divided
into three categories:
-
Certification
Services.
SGS certifies that products, systems or services meet the requirements
of standards set by governments (e.g. GOST R), standardization bodies
(e.g. ISO 9000) or by SGS customers. SGS
also develops and certifies its own standards.
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Inspection
Services.
SGS inspects and verifies the quantity, weight and quality of traded
goods. Inspection typically takes place at the manufacturer/supplier's
premises or at time of loading or at destination during
discharge/off-loading.
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Testing
Services.
SGS tests product quality and performance against various health,
safety and regulatory standards. SGS operates state of the art
laboratories on or close to customer's premises. Certification
Services. SGS certifies that products, systems or services meet the
requirements of standards set by governments (e.g. GHOST R),
standardization bodies (e.g. ISO 9000) or by SGS customers. SGS also develops
and certifies its own standards.
What is bank SOFT PROBE?
A soft probe is a confirmation method used by banks to verify funding for
seller from a buyer, conducted by the seller's bank to the buyer's bank.
Such a probe is not recorded in the buyer's banking information and
usually nothing but the seller records confirmation or lack of
confirmation. Seller sends a soft document to buyer's bank to make certain
buyer has enough funds or financial facility to complete transaction
between them.
SWIFT – Society for worldwide Interbank
Financial Telecommunication.
A global service which is responsible for facilitating communication
between banks. Most payments are made via SWIFT. More information: http://www.swift.com/about_swift/legal/swift_contracts/
Introduction to Letter of Credit
Letters of credit are a payment mechanism, particularly used in
international trade. The Seller gets paid, not after the Buyer has
inspected the goods and approve the, but when the Seller presents certain documents (typically a bill of lading
evidencing shipment of the goods, an insurance policy for the goods,
commercial invoice, etc.) to his bank. The bank does not verify that the
documents presented are true, but only whether they “on their face”
appear to be consistent which each other and comply with the terms of the
credit. After examination the bank will pay the seller (or in LC terms the
beneficiary of the letter of credit).
Letter of Credit, Standard Example:
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Buyer
and Seller sign a purchase contract that stipulates payment by letter
of credit. It is good practice to agree already in the purchase
contract which documents the Seller/Beneficiary has to present.
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The
Buyer/Applicant goes to his bank (so called issuing bank) opening the
credit to the benefit of the Seller, in particular the Buyer tells his
bank which documents the Beneficiary has to present, where and how,
and the amount of the credit and details of payment (by sight,
deferred sight payment, against acceptance or negotiation of drafts.)
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The
Issuing bank, which is normally located in a foreign country, advises
the Beneficiary through a correspondence bank located in the country
of the Beneficiary of the credit. So in step no. 3, the Issuing Bank issues
the L/C and forwards it to the Advising Bank.
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The
advising Bank checks the apparent authenticity of the L/C and advises
the L/C to the Beneficiary.
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The
Seller/Beneficiary checks if the L/C complies with the commercial
agreements and if all terms and conditions specified in the L/C can be
satisfied, then the Seller ships the goods.
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The
Beneficiary assembles the documents specified in the L/C, checks the
documents for discrepancies with the L/C, draws the draft and presents
the draft and the documents to the advising Bank and presents the
necessary documents to his local bank which pays him after examining
them.
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The
Advising bank bears the draft and the documents against terms and
conditions of the L/C and forwards them to the Issuing Bank.
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The
Issuing Bank checks if the documents comply with the L/C and makes a
payment immediately (if the L/C is available by sight) or on a certain
date (if L/C is available by deferred payment).
Confirmed Letter of Credit
Confirmed Letters of Credit have the advantage that the payment obligation
of the confirming bank is independent of the issuing bank. Buyers may
obtain injunction against the issuing bank in their home country to
prevent the bank from honouring the L/C. Obtaining an injunction in a
foreign country is more difficult.
Standby Letter of Credit
A standby letter of credit is basically a bank guarantee. Previously U.S.
banks were not allowed to issue guarantees and circumvented this
limitation by issuing standby letters of credit where the beneficiary
basically has to present his face to get paid. Most letters of credit,
particularly in international transactions, are subject to the Uniform
Customs and Practices (UCP) issued and published by the international
Chamber of Commerce (ICC). The current revision UCP 600 is publication No.
600 of the ICC and takes effect as of July 1, 2007. Since the ICC lacks
legislative authority, meaning it is not the arm of or authorized by any
government but rather a trade association, the UCP are no laws and have to
be explicitly incorporated into individual transaction. Some countries and
states have enacted statutes regarding letters of credit (see e.g. Article
5 US Uniform Commercial Code). In international trade however, most
parties choose to use the UCP.
LETTERS OF CREDIT VARIATION
CL/C (Confirmed letter of Credit)
A letter of credit, issued by a foreign bank, with validity confirmed by a
First Class (usually US or European) bank. A seller with CL/C terms is
assured of payment even if the foreign buyer or the foreign bank defaults.
DL/C (Documentary Letter of Credit)
A document issued by a bank, which guarantees the payment of a buyer's
drafts for a specified period and up to a specified amount. The
Documentary Letter of Credit provides a more secure means of carrying out
transactions in import-export trade than by documentary bills collection
(see Bill of Exchange). A letter of credit when transmitted through a
bank, usually in the seller's country, becomes the means by which the
seller obtains payment. The necessary documents, correctly completed, are
presented to a bank by an agreed date. If the terms of the credit are met,
a seller can receive payment from a bank immediately.
L/C (Irrevocable Letter of Credit)
An Irrevocable Letter of Credit cannot be amended or cancelled without the
consent of the issuing bank, the confirming bank (if confirmed), bears the
further payment undertaking of another bank, usually the advising bank,
called the Confirming Bank here since it adds its confirmation to the
letter of credit. This may also be used if the issuing bank is of unknown
doubtful standing to the seller and beneficiary. The bank guarantees the
payment if the credit terms and conditions are fully met by the
beneficiary. The words Irrevocable Documentary Credit or Irrevocable
Credit may be indicated in the L/C. It means that once the buyer's
conditions in the letter have been agreed to the seller, they constitute a
definite undertaking by the buyer's bank and cannot be revoked without the
seller's agreement.
Revocable Letters of Credit
Are rarely used as the terms of the credit can be cancelled or amended by
an overseas buyer at any time without notice to the seller.
RL/C (Revolving Letter of Credit)
It is a financial guarantee or performance bond issued by a bank on behalf
of a buyer i.e. a written obligation of the issuing bank to pay a sum to a
beneficiary on behalf of their customer in the event that the customer
himself does not pay the beneficiary. The SL/C is regulated by the ICC600
rules.
SBL/C (Stand-by Letter of Credit)
It is a financial guarantee or performance bond issued by a bank on behalf
of a buyer i.e. a written obligation of the issuing bank to pay a sum to a
beneficiary on behalf of their customer in the event that the customer
himself does not pay the beneficiary. The SL/C is regulated by the ICC600
rules.
PAYMENT
The offered payment method can greatly affect the price offered by the
seller; the more secure the payment the cheaper the price. Sellers are
looking for more security in payment and because of high percentage of
dropouts paying by ordinary DLC. Very few sellers will offer this payment
option anymore. Our minimum payment option is IRDLC revolving for one
month's shipment value. For larger contracts the seller is looking for one
month's shipment value held by the seller as surety against the buyer
dropping out.
So what does all that mean? In the past a buyer would contract a quantity
say up to 12 tonnes more than the quantity they actually required; they
pay for 1 or 2 shipments and then drop out; after having obtained the
benefit of a price offered for the much larger quantity. Also buyers would
drop out of a contract because they had since found a seller with a
cheaper price. Payment option can vary with the commodity, such as sugar,
where payment may be mandatory by FFBG with some sellers.
STANDARD PAYMENT OPTIONS
Note all payments must be confirmed by Top
50 Prime World Bank.
Confirmed, irrevocable Letters of Credit give the seller the greatest
protection, since sellers can rely on the commitment of two banks to make
payment. The confirming bank will pay even if the issuing bank cannot
or will not honour the draft for any reason whatever. In accordance with
the additional risk assumed by the banks, however, confirmed, irrevocable
letters of Credit are more expensive than unconfirmed Letters of Credit.
HERE ARE SEVERAL PAYMENT OPTION PREFERRED BY SELLERS
IRDLC – Payment by Irrevocable, Transferable,
Auto-Revolving for one month's shipment value, Documentary letter of
Credit, Confirmed by Top 50 Prime World bank, 100% at sight Port of
Loading.
FFDLC - (assured for 6 month contract value)
Payment by Fully Funded, Irrevocable, Transferable, Auto-Revolving for one
month's shipment value, Documentary Letter of Credit, confirmed by Top 50
Prime World Bank, 100% at sight Port of Loading.
Basically with this payment there is an LC opened for 6 months value that
is guaranteed by the Buyer's bank for that amount. In the fifth month,
there is another 6 months LC opened for the last batch of shipments.
However, the payments are still paid one month at a time, but the LC is
guaranteed for 6 months value.
FFDLC - (assured for full 12 month contract
value) Payment by Fully Funded, Irrevocable, Transferable, Auto-Revolving
for one month's shipment value, Documentary Letter of Credit, confirmed by
Top 50 Prime World Bank, 100% at sight Port of Loading. This LC is
guaranteed by the Buyer's bank for the full contract value.
IRDLC + BG - Unconditional Bank
Guarantee for one month's shipment value held as security for payment and
then monthly payments by Irrevocable, Transferable, Auto-Revolving for one
month's shipment value, Documentary Letter of Credit, confirmed by Top 50
Prime World Bank, 100% at sight Port of Loading.
IRDLC + BG (3 month) – Payment by
Irrevocable, Transferable, Bank Guarantee for 3 month value to be held by
the Seller as security for payment. This bank guarantee will be returned
to the Buyer at the end of the contract period unencumbered. Each shipment
shall be paid for via Telegraphic transfer within 24 hours of receiving
the shipping documents. This Irrevocable, Transferable 3 month Bank
Guarantee should be issued, confirmed and guaranteed by Top 50 Prime World
Bank acceptable to the Seller.
FFSBLC – Payment by Irrevocable, Fully Funded,
Revolving Stand-by Letter of Credit for the total value of the goods with
one month face value. The Irrevocable revolving Stand-by letter of Credit
should be issued, confirmed and guaranteed by a Top 50 Prime World Bank
acceptable to the Seller.
BG or FFBG – Payment by Bank Guarantee
confirmed by Top 50 Prime World Bank.
The Buyer's bank is guaranteeing the funds for the full contract value,
therefore with payment by BG means the buyer has the money sitting in
account, pledged- that is why it is called 'Bank Guarantee'. There are
other acceptable payment methods and also variations of these payment
methods above applicable to certain commodities that could be acceptable,
and will be outlined in full detail in the Soft Offers.
What is a EUR 1 Certificate?
EUR 1 is the name for a form, which is used in international
commodity traffic. The application of this form is based on application of
various bi- and multilateral agreements within the Pan-European preference
system (the European Union Association Agreement). In the free trade
agreements goods are defined, which apply to cheaper rates of duty or to
be completely duty-free introduced, on the condition that they were
completely manufactured in a member country or in such were so far worked
on that they become on an equal footing in accordance with the agreements
of the origin of the products. In order to profit from the preferential
rate during a customs clearance, a EUR 1 movement certificate, in
short EUR 1, must be handed over to the competent
Authority (usually a customs administration), in which the manufacturer
certifies the origin of the goods.
The EUR 1 is recognized also as a certificate of origin in the
external trade in legal sense. In place of a movement certificate also a
declaration of origin on the invoice can be provided by the manufacturer
or sender of the goods, if the amount of items with EU preferential origin
of a single shipment does not exceed €6,000. If it concerns an approved
exporter, the delimitation of 6,000 Euro does not apply. The creator of
such a movement certificate or declaration of origin must be able to prove
the origin characteristics of the goods with a possible check on supplier
declarations.
The exporter fills in the form and then hands it over or sends it in to
the competent authorities, usually customs, which stamp it and send it
back to the exporter.
What is a T2L Certificate?
T2L certificate is a Single Administrative Document that is used
throughout the European Community and EFTA countries for the control of
imports, exports and goods in transit. Customs authorities in individual
member states issue this certificate.
What does GMO mean?
If you have shopped in a natural foods store in recent months, you have no
doubt seen products bearing the label “GMO-free” or “contains only
non-GMO ingredients”. The acronym GMO stands for Genetically Modified
Organisms, which refers to any food product that has been altered at the
gene level. Genetically modified foods are also frequently described as
“genetically engineered”, “genetically altered” or “genetically
manipulated”.
PLEASE NOTE:
It is always best to ask for a BCL (Bank Comfort Letter) to confirm
buyer's ability to make the necessary payments, provided along with the
LOI or ICPO. Whilst permission for a Soft Probe, which may be offered in the LOI, may
sound nice, but it’s not recognition of a commitment to the contract in
hand. A BCL should list a full description of the merchandise, the
quantity, the total contract value and monthly revolving amount etc.
expressed in US Dollars. Also as a Top 50 Prime World Bank this is
virtually a guarantee of such payment as confirms payment outlined. BCL
with bank disclaiming any responsibility is totally unacceptable. If a
buyer will not provide a BCL it is an indication that he cannot finance
the deal and or Top 50 World Bank does not confirm the deal as required.
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