Lets continue. 

D/A: stands for Documents Against Acceptance.  This can be for 60 ,90 or 120 days. Actually it does not mean anything to have DA for 30 days since that is what it takes for the ship normally to arrive to port and since the whole point of a D/A transaction is to give you payment terms, you can see that it offsets the point. 

Furthermore, it makes more sense to do D/P in the above case since you end up paying less charges. 

D/A in the business circle is commonly known as Death in Advance.In laymans terms, the supplier does the shipment, he sends all original documents to your bank, your bank gives you the documents against the PROMISE that you will pay in the stated time. 

If you don’t pay, the bank cant do anything except for putting you in the black list. Hence your supplier will need to go to the judiciary system to put a case against you. This normally does not happen since it takes too many years. Most probably the seller will end up having to negotiate with you. 

As you can see this is a transaction based on trust. Its as if you were to get payment terms from your supplier but internationally.  

Note that there are heavy charges as well as interest charges involved here. This way of payment is commonly used in south america, africa, and markets where there is a good profit margin to offset the higher costs ( eg africa) or where you need to have a constant rotation of goods and have limited liquidity. 

You can see a flow diagram of the above in the following link: http://www.aibtradefinance.com/tf/ProductDiag2.asp  

The 2 last modes of payment are: 

T/T: stands for telegraphic transfer. Very simple , you send payment thru the bank. Normally the supplier sends you documents after getting the payment. 

Free Documents: as above, but means that the supplier sends you the documents first and then you pay him in the time you both have decided. It is same like D/A but the documents don’t go thru the bank. The supplier sends them directly to your office. Hence there are no charges. 

Of course the latter one is normally done with someone you really trust and I have seen it most in dealings house-to-house, ie where the exporter has sold/sent goods to his own import office in the destination country. 

Hope that helps.

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If we said before that lcs are no longer the preferred way of payment, then you must clearly understand the following forms of payment. 

D/P at Sight : stands for Documents Against Payment. In laymans terms, the supplier does the shipment, he sends all original documents to your bank, your bank gives you the original documents against payment. If you don’t have the original documents then you cannot release the goods from port ( in theory, more on that later ). 

When using D/P terms , it is common for a deposit to be given first by the buyer.The reason for this is that D/P is in the normal busioness circle as Death Postponed.  

Why?? Because once documents arrive, the buyer can always choose not to take the documents and not pay and not take the goods. In this case the supplier will need to find a way to negotiate with the buyer to take the goods, or find another buyer or send the goods to another port,etc,etc. remember at this point the goods are property of the seller. 

Sellers prefer this way since fist they have a  deposit which is normallyh of 20-30% hence it is unlikely for you not to take the goods unless special circumstances, or if you a reprepared to loose it.  

As a matter of fact one of my main suppliers called me up just 3 days ago asking me whether I wanted to take some goods of cookware which he had produced and ready in his factory in china. He was ready to give me 10% discount which was the deposit received from his US buyer. Unfortunately his US buyer has declared bankrupcy and has closed down, so my supplier has the 10% deposit with him. 

From a buyers point of view D/P is good since it gives you some credit terms to pay. Remember that the ship will take about 30 days to arrive your port, hence that is really time you are buying. You are basically playing here with the suppliers money without having to pay for 30 days interest.  

The other advantage of course is that you may decide not to take the goods if for example they arrived late hence you would be loosing only your deposit. 

On a final note I leave you this link where you can find a very good flow diagram of D/P ( though of course, if you need any further help, you do know where I am!! ): 

http://resources.alibaba.com/article/61/Documents_against_Payment_D_P_flow_diagram.htm 

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Before I conclude with lcs ( for now ), you might know that there are different terms involved and types of lcs you may encounter.  

Ill go briefly over the main ones in case you are a little “lost” with the technical lingo: 

Irrevocable : basically means that once the lc is issued it cannot be taken back till it expires 

Payable at sight : basically that (if all terms are met 100%) the payment will be done immediately 

Deferred : basically that (if all terms are met 100%) payment will be made after some time ( you choose, maybe 30 days after, 60 days after,and so on) (note:normally there are interest charges here ) 

Transferable : basically that you (as a buyer) open the lc on your supplier and he can transfer the same lc to his supplier. He can only change the amount and the delivery date. To the end supplier only your suppliers details will appear and not the end buyers. This is a common way of payment where the intermediary supplier does not reveal his source to his buyer, his buyer to his supplier, his margin, and he does not involve his money. 

Back to back: basically the supplier takes your lc as a guarantee, and against this his bank opens a fresh new lc to his supplier. This form of payment is very rare nowdays and I believe only some american banks use it since a little mistake can cause the operation to go wrong. I know in spain most banks refuse to open back to back lcs. 

Having said that, lets encounter the other forms of payment you must be aware of in the next chapter.  

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Ok, so you want to be a smart buyer? 

Here is my pearl of advice.

Always put an Inspection Company Clause in the terms of your LC. 

You cannot imagine the amount of times I have saved myself from loosing money just because of this clause. By the way, I am assuming that you are an honest professional businessman since this clause in itself can be used wrongly to your advantage. 

Putting an inspection clause does 2 things. 

First  of all it makes your supplier note that you will be sending someone to inspect the goods. WHETHER YOU SEND SOMEONE OR NOT IS IRRESPECTIVE. The point is that your supplier will be more likely to produce the goods correctly just because of that fear. 

The second is that it will always give you an upper hand in deciding whether to pay or not in case the goods are wrong. 

Since one of the documents that your supplier will need to present to the bank in order to get payed, will be a signed letter by your inspection company, then this means that he will always be depending on you o your inspector to receive this letter. 

Remember that for your supplier to get payed he will have to fulfill 100% of the terms of the lc. If one of the terms is to present the original duly signed and company chopped letter stating that so and so goods are in good order, then without that he cannot get payed. 

I have posted an example of this clause up in the free resources, please make sure to look it up. 

I cannot stress enough  the times this clause has saved me from disaster, I repeat from disaster. 

Also note a very important point:  the bank IS ONLY CONCERNED WITH THE DOCUMENTS. For the last years I have even been putting one of my old companies as the inspector in the clause. Then what I do, once I know that shipment is all ok, since I have the old stamp and letter head of that company, I make the letter , chop it, sign it and send it to the supplier who then presents it for payment. 

The bank does not know that the inspector is a company that is closed down. They also don’t care.   

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Ok, so buyers have become very smart. 

Yes. The fact is that they chinese manufacturers or staff don’t know how to present documents correctly to the banks for collecting the funds once the shipment is done. 

Suppliers know this, hence the reason for them not to prefer this way of payment. See you got to realise that there are a lot of unprofessional buyers out there. The bank when the documents are presented to them, is trained to look for discrepancies. A discrepancy can be a stupid thing like you misspelling a name, for example instead of spelling “manoj”, u spell it as “manog”.  

Now a stupid spelling mistake can be the reason for the buyers bank saying “hang on a minute, there is a problem here, the seller has not done everything as per directed so I retaing my right to pay”. At this point you got to remember that the goods are already on the way to the buyers destination, hence the seller is in effect at the buyers mercy. 

If they buyer is understanding he will tell the bank to accept the discrepancies, if he is not then the seller will most probably end up having to give a discount for the buyer to tell his bank to pay. 

I know many of you might think that the above is not true, the fact that for a spelling mistake things can go so wrong.  

But this is technically true. Another thing is whether your bank agrees to see this as a discrepancy or not, where the issue comes of how much power you have with your bank. 

When I was living in Hong kong, I would hear many stories from other exporters and suppliers as to the way in which buyers from Dubai ( a major reexport market) would tell their banks to look for discrepancies in the documents so as to get a discount. 

As a matter of fact I would say that in the past 10 yrs of me dealing with lcs, in 95% of them I have encountered discrepancies.  

Just think the power I have had in may hands to decide to pay or not the supplier. And just think why banks always encourage you to pay by lc. If each discrepancy costs you about usd 100 (that’s free money that is going in the banks pocket). 

I hope you understand now the reason why sellers are less and less using this form of payment. 

And don’t worry if you are forced to use lcs. 

Ill show you in the next chapter a technique used by me to have the upper hand in the payment terms, always. 

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Ok, so now you are a “Master” in the type of documentation that you will face. I shall be posting some real examples up so you know how these documents really look like . This will specially help the novice buyers. 

There are different ways of payment you should know about.  

Lets start with The Letter of Credit: Put simply, the buyer and seller decide on the terms of the transaction and as long as the seller complies 100% with these terms, the bank pays on behalf of the buyer. 

The Seller will normally send you the clauses or terms he wants to be specified in the letter of credit. You go to your bank and ask for the letter of credit to be opened under those terms ( which you have already negotiated with your supplier). The bank then opens what would be a “payment guarantee” to your suppliers bank. (you most probaly will  need to put a deposit for the letter of credit depending on your bank.) 

Ok that simply put is what it is all about.  

Now, this used to be the preferred way of payment for suppliers before, since in effect the letter of credit ( or l/c as it is commonly known) acted as a guarantee for them to start production and serve the goods. Also you must understand that before it was a sellers market , ie the buyer needed the goods. Hence even if there was some discrepancy( that is when there is a fault in the documents or when any of the clauses are not met), it was likely for the discrepancy to be sorted out and the payment made. 

If before 99% of transactions where done with L/cs, nowdays I would think that it is only 30% of the overall transactions.  

The reasons are mainly that buyers have become very smart and that there is more of a chance of the seller being in the “buyers hand” in deciding to pay or not.  

Ill explain myself in the next posting.

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Finally,  The Customs Declaration Form: The information on this document is normally presented by your customs agent and it basically takes into account all the information of the invoice, packing list, bill of lading and form A. 

This document is generated automatically by customs and in many countries it is an automated process thru the computer.  

This document will calculate the value of the goods in your currency, the total duties you need to pay, and the total tax you have to pay to the government. 

A Pearl of Advice for you : Inform  your customs / forwarding agent of the goods that are on the way. Different descriptions normally pay different duties. Eg declaring child scooters as a toy may pay a 4% duty, but declaring it as a vehicle can pay 12%. This is a legal way of turning the system in your favour and your customs agent will know what to put. 

Of course, it may happen that the customs decide to open the container and check the goods.  

As long as you are not bringing in anything illegal, you can always defend your case that you believe it is a toy ( following the above example). In most cases you will end up paying a minor fine in order to clear the goods and close the chapter since obviously you don’t want the goods to be held up. 

By the way before I forget, 2 more things you should know: 

a)Since the customs cannot physically check 100% of all documents      ( you would be a gradfather by the time they would release your container to you), normally once documents are presented, the customs computer ( depending on the country) randomly decides which container is passed Green, Orange or Red colour. 

-green means that the container can be released without even presenting the actual physical documents to customs ( it is electronically presented by your customs or forwarding agent ).

-orange means that the container can be released but once they check the actual physical documents.

-red means that the container will be placed in a separate place and the it will be opened and the goods will be revised. This by the way means an average of 3-5 days delay , plus port charges in positioning the container in a special place and inspection charges. 

Forget complaining. You cant do anything about it. 

b)If it is the first time you are importing, I suggest you don’t do any “hanky-panky” since there is a 100% chance that your goods will come up Red and will be checked as you are new in the system. 

To make my point clearer, I don’t suggest or advice to doing any hanky panky ever. 

Another Pearl of Advice: Normally the customs computer ( depending on which country we are talking about ) calculates the exchange rate based on last months average. Hence you can delay / advance the presentation of the documents depending on whether it is in your favour or not. ( of course you got to balance against the port charges incurred in delaying taking your container from the port “parking space”, etc ). 

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CERTIFICATE OF ORIGIN: As simple as a certificate issued by the China Export Authority certifying that the goods are of china origin, ie. That they have been made in china. 

The China Certificate of Origin used to be essential till about 5-6 years ago in order to not pay that high duties. Now adays however with the new age of lowering of tariffs and duties globally , you end up paying in majority of cases the same duties whether you have this certificate or not. 

It is however advisable to always have it just in case for mainly 2 reasons: 

a)You can many times know who is the actual factory producing the goods for you ( you can in this way bypass the exporter ).  

Though,  Dont get too excited about this. Exporters have become smart.  

As a matter of fact one of my good exporter friends in hong kong used to have a pad of about 100 signed and chopped certificate of origins in his drawer ( they are known as “Form A” ) all with the same name of manufacturer. Whether he exported lighters or dvds, the same manufacturer would appear in the buyers form a, hence they would never reach to his direct factory.  

The other side of the coin is that not all of them have those contacts to be able to do the above, and hence you can at least find out the region or town where the goods were manufactured. Many times this is enough since chinese factories are like “ant colonies”.  

Where there is one, in 2 seconds you have a million of them.  

Here is another Pearl of Advice for you: Knowing the town where one factory is can SAVE YOU TIME AND MONEY, not only in finding other sources of supply for the same item, but also in having offers to compare with.  

b)The second reason, we have really already taked about.  

The fact that for some items, there is a lower duty to be payed due to the cross-border agreements on import duties and tariffs if a Form A is presented in customs.  

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PACKING LIST : As simple as a list which lists the pieces per cartoon, weight per cartoon ( both net and gross ) as well as the sizes. This wll be helpful when calculating your final costs ( though you should have these calculated already ). 

BILL OF LADING : As simple as that document that tells you that the goods have been shipped. This document is one of the most important since:

-         it tells you what quantity has been shipped

-         it tells you when that quantity was shipped

-         it tells you on what vessel / carrier it was shipped

-         it tells you what was the total weight

-         it tells you who has shipped the goods

-         it tells you to whom have the goods been shipped

-         it tells you who needs to be contacted to claim the goods 

Without this ORIGINAL document you cannot release the goods when they reach the port. REMEMBER THAT. There are ways around that in case the document gets lost. 

At the same time it is also a document which can be forged easily with the right contacts.  

By the way if it is an air shipment you don’t need to have the Original Bill of Lading ( called Airway Bill of Lading ) in your possession. The moment the goods arrive at the aiport you can already clear them. 

That’s the reason why unless your supplier trusts you, he will not send you the goods by air before receiving prior payment. If you receive the goods and you don’t pay, he cant really do anything.   .   

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Lets continue with the “real stuff”. 

We already got out of the way the Sales Contract and Purchase Order, which are always the initial stages of the deal. What documents come into play next?? 

The next in line are written below, however i´ll give you a Pearl of Advice:: Once the shipment is done, make sure each and every day you ask your supplier to send you a sample copy by email or fax of what is going to be written on the next set of documents. 

Your supplier normally takes between 5-15 days to send the documents to you. You want to make sure early, specially if you are dealing with Letters of Credit ( more about that later ), that all the descriptions, prices, and details are correct before the final original documents are issued. 

Just by doing the above, you can save and save and save so much money and time in unnecessary silly mistakes. Ask any importer, he will tell you the stupid silly mistakes commited. 

Furthermore , you can even change the description early  to save on duties ( more about that later ).  

COMMERCIAL INVOICE: As simple as a normal invoice which in actual practice will contain all the details of the sales contract, plus the shipping date, etc,etc.  

Since it is an invoice from abroad , first of all it will be in USDollars which is the primary currency used for exports from china. Secondly there will be no tax on it since it is an import of goods.  

Locally in your market as you know, if you purchase an item for lets say usd 1, you will have to pay your supplier a price os usd 1+ the local tax,in spain it is 16%, in the uk it is 17.5%. The commercial invoice issued by your supplier will not have the invoice , only the net amount. The duties, taxes,etc you will pay locally in your market ( more on that later )   

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