However, cool down from the excitement, I do have to consider about how to handle the new business model. Since I used to do air shipping, not ocean, so the payments normally is not a problem because the turnover is quite fast, and usually it's not such a big amount. Now the customer prefers to pay 50% cash upfront, and use Letter of Credit for the other 50%. So, things get a little bit complicated.
Letter of Credit in the international trade serves as a means of payment guarantee. It normally issued by the banks, so both buyer and seller can have peace of mind that both parties will carry out the obligations according to the terms. Most common type of L/C used in International trade is irrevocable credit, which means the LC cannot be changed unless both parties agree. It is very risky with a revocable LC, because changes can be made without the beneficiary's (the seller's) consent. In practice, I have never seen anybody used this method.
Who prepares what?
The Supplier: Commercial Invoice, Packing List, Shipper's Letter of Instruction (for export purpose), Health Certificate, contract
The forwarder: Bill of Lading, Certificate of Origin
The buyer: Letter of Credit, contract
Before the buyer issues the LC, the seller normally provide a proforma invoice, which contains pretty much the same information as the commercial invoice if the order results.
The points to be included in the proforma are:
- Both parties' names and addresses
- Buyer’s reference
- Products quoted
- Prices of goods: unit price and total price
- Quantity of the goods: Weights and dimensions
- Discounts, if applicable
- Terms of sale or International Commercial Terms used, include delivery point
- Terms of payment
- Estimated shipping date
- Validity date
After the boat leaves US wharf, shipper is subject to pay the forwarder before the forwarder will issue the Bill of Lading, which is a must for clearance of the custom. The the supplier gets all the documents together, and send them to the Accepting bank. After carefully checking the conformity of the documents, the Accepting bank sends the documents to the Paying bank. The Paying bank will issue the payment according to the L/C terms.
Note: watch out the reasonableness of the terms listed in L/C, because the buyer can refuse to pay you by disputing you breach of the contract. For example, they want every lobster to be exactly 1.99 lbs. Well, obviously, it's not possible, but if you're not careful, and you sign your name, then this sale may end up putting your house up for sale.
Sounds like fun? International Trade is a world of excitement.
