Discount: Defined here in relation to the discounting of Commercial Paper – typically Bills of Exchange. Where a future dated Bill of Exchange has been accepted by the drawee [the one who's due to pay - see below], it may be possible to discount the Bill. A Discount House [or bank] may agree to advance the bulk of the face value of the bill, thus helping your cashflow. Discounting can be with or without recourse [see Recourse, later on]. Usually only bank endorsed bills will be discounted without recourse [except for some specific agreements - usually restricted to larger, multi-national
businesses].

Drawee: The party on whom a Bill of Exchange is drawn, i.e. the one who is buying and has to make payment.

Drawer: The party who draws up the Bill of Exchange – the seller.

Drawing: In terms of Letters of Credit, a drawing is the presentation of documents for payment/acceptance under the Credit. Depending on the terms of the Credit, a drawing may be for part or the whole of the value of the Credit.

Due Date: The date on which payment of an accepted Bill of Exchange or a drawing under a deferred Letter of Credit becomes due. [A deferred Letter of Credit is one where there is a credit period between presentation of documents and payment, but no Bill of Exchange has been called for].

Duty: Import Duty may have to be paid on certain imports into the UK. Generally, there is no duty on goods that are already in free circulation within the EU. For goods imported from outside the EU, rates depend on product and Country of Origin. Duty rates are always based on the CIF value of the goods [regardless of which Incoterm was actually used for the contract] and VAT is added to the CIF value. Care, rates can and do change regularly and at short notice. Customs Duty is different, and applies to specific goods irrespective of their origin, for example, cigarettes, alcohol, etc. coming into the UK. For both types, it is usual
to have to pay the relevant duty amount to HMRC before goods are released [but see Duty Deferment below].

Duty Deferment: For regular importers, it may be possible to obtain a Duty Deferment bond from your bank and lodge this with HMRC. The effect of such a bond is that goods are released quicker and you pay the duty in arrears. There is a cost insofar as the bank will view this as a contingent liability and may require security and will almost certainly charge you for its issuance. Also, the bond must cover an average 2 month’s value of imports.

CMR – Convention Merchandises Routiers: These are the conditions for the international movement of goods by road.

Collections: Again, held over from Issue 10. A bank collection is the collection of trade debts through the banking system whereby documents relating to the shipment of goods are passed through the banking system and exchanged either for payment or an acknowledgement of acceptance [usually by means of a Bill of Exchange] for payment at a fixed future date. Both buyer and seller must agree to this course of action at the start and, unlike Letters of Credit, there is no undertaking by the bank to pay. It is generally felt that this is a more secure method than open account trading.

Confirmed Letter of Credit: I will cover this when we look at Letters of Credit, later in the series.

Consignee: The party to whom goods are sent.

Consignor: Also known as the shipper; the party despatching the goods.

Consignment (1): The underlying goods sent by the consignor to the consignee.

Consignment (2): Care – if goods are exported subject to consignment, the exporter will only receive payment on completed sales. Any unsold may be returned to the seller, at the seller’s expense. Can be high risk and expensive.

Containerisation: The use of sealed containers into which goods are packed for shipment.

Convertible Currency: A currency that can be freely bought and sold for other currencies at will, e.g. Sterling, US Dollar, Euro, etc. Exporters must ensure that payment for their goods will be in a freely convertible currency. Note, however, that this may not necessarily mean that funds will be immediately available, if the country concerned still uses exchange control.

Correspondent Bank: A bank that operates in its own Country the business of a foreign bank.

CPT Incoterm: Carriage Paid To [named place]. The seller clears the goods for export and pays for delivery to a named place. The goods are deemed to have been delivered, and the responsibility for them passes to the buyer, once they have been taken by the seller’s carrier.

Customs: Generic term for HMRC. Whether you are importing or exporting, you must follow HMRC regulations, which are complex and detailed. If you use a freight forwarder or shipping agent, they can undertake much of the customs procedures on your behalf but, like tax returns, you are still ultimately liable for the accuracy, etc. of all declarations.

Customs Commodity Code: Also known as CN Code. An 8 digit code required for all goods to be exported outside the EU. Imports from outside the EU have a 10 digit code. These must be entered on the relevant documentation and are available from HMRC via their publication known as The Tariff.

Http://www.inttradefinsolns.co.uk

Tomorrow, “A Case Study”.  Today, Part 2 of the glossary of terms – the “B’s”.

That’s B’s as in the letter B, not anything else, although the 2 terms that I’m covering here are right B’s!.  Before anyone starts worrying, I’ve no intention of filling out the next 26 issues with 1 letter per month, partly because we’ll all lose the will to live and I’ll get stuck on some of the more exotic letters later on.  It just seems that the early part of the alphabet has more terms.  However, the letter B will be rewarded with more next month……..

OK, then, the 2 worst B’s.

Bill of Exchange

One of the most confusing documents until you understand it, then it’s easy – honest! Often referred to as B/E, BEx, BoE and some other variants.  Here, I’ll call them

B/E. There’s the legal definition and a more colloquial one, both of which do explain.

The legal one first.  B/E have their own piece of Legislation, The Bills of Exchange Act, 1882.  In it, a B/E is defined as ‘An unconditional order, in writing, addressed by one person to another, signed by the person giving it requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time, a certain sum of money to, or to the order

of, a specified person or to bearer’.  There, clear as mud.  Perhaps an easier way to explain is to think of a cheque.  If you think of a cheque as a form of ‘IOU’ in as much as if you owe me money, you will write out a cheque in my favour.  The B/E, however, is a ‘You Owe Me’, i.e. in the above scenario, I would write out the B/E and sign it, before giving it to you.  In turn, you would sign to acknowledge the debt due, and then pay according to the terms – straightaway [pay on demand] or later [at a fixed or determined future date].  B/E are not common in UK trade these days [except for some specific sectors] but are common in International Trade – especially for those who deal with Letters of Credit or Collections – both of which will be explained when we get to the relevant letter.  Therefore, if you do deal with these, it’s important to understand what a B/E is and, more importantly, what you can do with it, since, especially under Letters of Credit, they can be used to raise funds.

Bill of Lading

Not to be confused with B/E above.  Bills of Lading are often referred to as BL or BLading.  BL here to save space.  A BL is a document of title to the goods to which it refers.  It is issued to cover sea shipments and is usually issued by the shipping company.  It also acts as a receipt for goods received for carriage and providesevidence of the terms of the underlying contract between the shipper and transport company.  Being a document of title, the buyer [or more usually their agent] needs to present an original BL at the destination to obtain the goods.  BL are often issued in sets of 3 original – any one can be used to collect goods – plus any number of non negotiable copies.  It is important that, as a buyer, you know how many original BL are to be issued and that you can account for them all.  They are usually referred to in documentation,as, for example, 3/3BL + 2NNC, meaning 3 original Bills of Lading

[any of which can be used to obtain the goods] and 2 Non Negotiable Copies.

That’s more than enough for this month.  Both are important, though, and if you are involved in International Trade, it is well worth taking the time to understand their functions and some of the drawbacks and advantages of using them.  For Bills of Exchange, they can have a beneficial effect on cashflow in some circumstances, so find out more before you sign any contracts.

Today, Ray starts his glossary of common international trading terms.

Over the course of the next few issues, I thought that it may be useful to include some of the terms that are often seen in International Trade and a brief explanation.  I cannot promise to include every one – we’d be here for ages but I will try to incorporate some that, from personal experience, I know have caught out both importers and exporters.  I’ll also try to keep things alphabetical, so if anyone wants help on a particular term or expression and I have passed that point in the alphabet, let me know, and I’ll include it in the next available newsletter.

Here goes…..

A.

Acceptance.

(See yesterday’s post). When applied to Bills of Exchange, it is the act of the buyer [the Drawee] accepting  that the amount quoted on the bill is correct and is a valid sum due from them to the Drawer.  Acceptance is achieved by signing the bill - usually in the form ‘Accepted, for and on behalf of XYZ Ltd, [plus signature & designation]‘.

Accepting Bank.

The bank specifically mentioned in a Letter of Credit as being the one upon whom any required  Bill of Exchange is to be drawn.

Ad valorem.

Literally, according to value.  Included here since some banks still levy a sliding scale of charges [ad valorem] to some of their International services.  Also important to be aware of minimum/maximum fee levels when comparing the offers of different providers.

Advising Bank.

Within the confines of Letter of Credit operations, a  bank, located in the exporter’s Country that handles the Letter of Credit, advising it to the exporter.  Should future

amendments, etc. be needed, these will also usually come through the advising bank.  Note, however, that the advising bank is not necessarily responsible for payment

nor may you be limited to only dealing with this bank when you come to present documents and seek payment.

AirWay bill. 

The shipping document used when goods are transported by air.  Unlike a Bill of Lading, it is not a document of title.  AWB’s are issued in multiple copies; it is usually copy 3 that is the one passed to the buyer and which he or his agent needs to present to obtain the goods in the destination Country.

Aval, avalisation.

Applies to Bills of Exchange.  Unlike cheques, which are a form of Bill of Exchange, all parties to a Bill have to sign/endorse the Bill.  Where someone whose name does not appear on a bill signs it, they are said to have added their aval or avalised it.  The effect of doing this makes then liable should the bill be unpaid by the other parties.  Often requested of banks by holders of the bill.  A bank avalised bill is almost as good as cash and can be sold to obtain funds and help cashflow.  Often overlooked by sellers.

OK, that’s enough.  B’s next time……..

Tomorrow, Ray begins a glossary of terms which are apt to confound and confuse importers and exporters!

The Risk Ladder is one way to demonstrate some of the ways in which overseas trade can be financed.  It focuses on the relative advantages and disadvantages, mainly from a cashflow point of view and clearly shows that, usually, what’s best  for one party will be the least favoured for the other.  Such is the way with most trade.  There is always the over-riding aspect of how you get on with your counter party, plus the fact that, in many instances, one party will hold the upper hand in terms of negotiating.  For example, if you have to buy your stock from 1 supplier only, you have a much more limited bargaining hand.  Nevertheless, the Risk Ladder is still a useful tool insofar as it explains the effect of various types of payment/settlement.

From this, you can assess the impact on your cashflow.  This, in turn, helps with finance planning and, if necessary, gives you longer advance notice of any pinch points in your cashflow.

OK, so what is it?  It takes the most common forms of payment options and their appeal [or otherwise] to both an importer and exporter.  Looking at an importer first, your preference is to pay as late as possible – ideally well after you have received the goods and sold them.  However, for the exporter, he wants money up front.  The following payment methods are in

descending order of preference for an importer and ascending order of importance for an exporter.

• Open Account.  Pay after receipt of goods
• Acceptance Collections.  Payment made by the acceptance of a future dated bill of exchange with all accompanying transport and commercial documents being processed through a bank.  The longer the acceptance term, the more beneficial for the importer, as he has longer to pay.
• Payment collections.  As above, except that there is no period of grace to pay. The buyer [importer] can only obtain the documents once he has paid for the underlying goods.   
• Unconfirmed Letter of Credit.  More costly to set up; the importer usually has to put some collateral aside for his bank to agree to issue.
• Confirmed Letter of Credit.  Even more expensive, but the seller [exporter] has the added benefit that a local bank [in his Country]  has added their name to the payment.

[Note that with Letters of Credit, it is the documents and not the goods that determine whether or not payment is forthcoming].

      Advance Payment.  Exporter is paid before he parts with goods.

With all of these, ITFS can help with more explanation, indication of likely costs and all other aspects of their respective uses and benefits.