Incoterms® - International Commercial Terms
International commerce terms, more commonly known as Incoterms®, are a set of international rules for the interpretation of the most commonly used trade terms in foreign trade. These terms are published by the International Chamber of Commerce, and are used to help traders avoid costly misunderstandings by clarifying the tasks, costs and risks involved in the delivery of goods from sellers to buyers.
To learn more about Incoterms®, visit The Incoterms® Rules for a short description of the 11 rules from the Incoterms® 2010 edition.
Benefits of Incoterms®
- Incoterms® help determine how prices and risks are designated between the importing buyer and the exporting seller with respect to shipping of products.
- It lets shippers take shipment transport cost and risk responsibility in hand when it benefits them most.
- They help improve supply chain performance by avoiding the confusion created by varied interpretations of the rules in different countries.
- The understanding and the proper use of applicable Terms of Sale may make the difference between future success and failure.
- Understanding Incoterms® and their implications to your business transactions is crucial, especially with regard to import or exports of goods.
- You determine your financial and commercial fate when you manage your Terms of Sale.
To learn how to use Terms of Sale advantageously for your business, contact one of our logistics specialists today.
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Letters of Credit
A Letter of Credit (LC) also referred to as a documentary credit, is a common method for payment of goods in international transactions. It is a commitment by a bank on behalf of the importer (foreign buyer) that payment will be made to the beneficiary (exporter) provided that the terms and conditions stated in the LC have been met. It acts as security for the exporter.
The primary issue in an international transaction is the seller's assurance that he/she is going to get paid. Establishing an Irrevocable Letter of Credit solves this issue by introducing the buyer's and seller's banks into the transaction. The buyer instructs his bank, the issuing bank, to open a Letter of Credit in favor of the seller, the beneficiary. The issuing bank substitutes its credit standing in place of the buyer, thereby lessening the risk of non-payment to the seller. The issuing bank then forwards the Letter of Credit to the seller's bank, the advising bank. This advising bank can either forward the Letter of Credit to the seller or it can add its confirmation, meaning the advising bank assumes the obligation to pay if all of the conditions are met.
Revocable and Irrevocable Letters of Credit
Letters of Credit can either be Revocable or Irrevocable.
- A Revocable Letter of Credit can be modified or canceled by the issuing bank at any time for any reason without notification to anyone.
- An Irrevocable Letter of Credit cannot be canceled or modified without the agreement of the issuing bank, the confirming or advising bank and the beneficiary.
Either way, a Letter of Credit must state on its face whether it is Irrevocable or Revocable.
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The seller faces the risk of cancellation of a Revocable Letter of Credit until he/she presents the proper documents, meets the required conditions and the advising bank honors the draft. After this time, the Revocable Letter of Credit cannot be modified or canceled.
With an Irrevocable Letter of Credit, the seller protects himself/herself since he/she has the time available until the stated expiration date of the Letter of Credit to make the shipment and present the necessary documentation.
Most Letters of Credit are Irrevocable because the seller is usually not willing to accept the uncertainty of receiving payment for his merchandise. Even though a bank issues a Letter of Credit, it is usually in a foreign country, and the seller will more than likely not be familiar with the foreign bank. In such cases, the seller will request that a bank in his/her country confirm the Letter of Credit. This confirmation reduces the risk of non-payment to the seller. An Irrevocable Letter of Credit can be confirmed, whereas a Revocable Letter of Credit cannot be confirmed.