There are many important details that need to be covered when dealing with cargo insurance—defined as the transfer of risk to a third party, the insurance company, who takes on the risk for a fee called an insurance premium—and every stakeholder involved in the international trade transaction has insurance.

Want to learn more about how to manage your company’s supply chain and logistics? Check out the FITTskills Global Value Chain online course!

For those who are aiming to obtain insurance, they must be aware of the process, which requires the following agreements by the insured and the insurer:

Setting the insurable value

The shipper can insure the cargo for the invoice value of the goods, plus freight and other charges. Most insurers offer insurance at 110 percent of the CIF value. The additional 10 percent is included as compensation for loss of profit. Generally, the beneficiary of the insurance policy determines which risks should be covered by insurance and negotiates to include that degree of coverage in the sales contract. It is rare to obtain insurance for more than 110 percent of the CIF value of the goods. The purpose of insurance is to compensate the insured for loss or damage, not to generate profit to the insured for the accident or event that led to the loss or damage.

Determining who takes out the policy

Usually, the terms of the sales agreement indicate which of the parties must obtain insurance. The Incoterms® 2020 rules for CIF or CIP require the seller to obtain cargo insurance to protect the buyer against the risk of loss. The rules require a policy that will allow the buyer to claim directly from the insurer, and requires the seller to provide the buyer with a copy of the insurance policy or other evidence of insurance coverage.

The remaining Incoterms®2020 rules leave the purchase of marine cargo insurance to the discretion of the buyer. Most insurance brokers are familiar with the requirements applicable to each trade term. The insurance ramifications of the Incoterms® rules being considered should be investigated before entering into a sales contract. Insurance can be quite costly, and in some cases it is unavailable.

Do you need a better understanding of Incoterms^® 2020 definitions/rules and obligations? The Incoterms^® 2020 online course, presented by FITT and the Canadian Chamber of Commerce (CCC), is designed to help international trade professionals gain an understanding of the latest edition of the Incoterms^® rules (which came into effect on January 1, 2020).

Finalizing the policy

Once all details of the policy are determined and the insurance premium paid, an insurance policy is issued to the insured. The insurance policy is the contract between the insurer (i.e. the insurance company) and the insured (the shipper on the B/L or waybill) in which the insurer promises to pay the beneficiary (the person named in the insurance policy) for damage to, or loss of, the insured goods due to particular risks.

Legal Considerations

In terms of risk, it is also important to understand the protections that may be provided to international trading organizations based on the conventions, treaties and agreements to which countries are signatories. It is important to understand the geopolitical aspects of international trade in order to determine how international conventions, treaties and agreement may be beneficial.

The answers to the following questions will assist in this assessment:

• What is being shipped?
• What is the shipment’s final destination?
• Who owns the land, air and sea en-route to the final destination?
• Where is it stopping along the way to the final destination?
• Are there passage rights, bans, boycotts, wars or trade restrictions on specific goods that could hinder the transportation of the goods being shipped?
• What is the process if an accident or natural disaster destroys some or all of the goods?
• What is the percentage of coverage, and where do the obligations of different stakeholders begin and end?
• What is the notice period to file a claim or initiate liability litigation? How should the notice be given?

The post Necessary agreements and legal considerations for cargo insurance in international trade appeared first on Trade Ready.

Businesses that operate internationally need to treat their cash flow planning differently than those that operate domestically. There are many additional details to consider for international transactions, including export costs which, ideally, should be determined alongside a timeline that tracks where and when these costs are incurred and when they are due for payment. These costs can be added to the company’s domestic costing worksheet to help the exporter fully understand the cash flow implications of trading internationally.

To help you understand more about some of these common costs in international business, we’ve compiled a list of 10 export costs you need to consider when projecting cash outflows along with an export cost timeline.

Figure 4.1 arranges typical export costs in the order in which they occur as a first step to projecting cash outflows.

For businesses that deal with importing and exporting in their operations, it is important to know which of these costs are the responsibility of the exporter and which ones are the responsibility of the importer. This can be easily determined by looking at the Incoterms® rules negotiated between the two parties during contract negotiations.

Want to learn more about Incoterms® rules?  Take the Incoterms^® 2020 online course, presented by FITT and the Canadian Chamber of Commerce (CCC).

The chosen Incoterms® rule determines the importer’s obligations and the exporter’s obligations, such as who pays the cost of transport, delivery and insurance. Learn more about these export costs below:

1. Business Development Costs

Even before the signing of a deal, there are various business development costs associated with making the sale. These may include travel, telephone and fax, promotional and marketing costs, legal fees, and possibly foreign agent’s fees. Most of these costs must be paid up front, regardless of when/if a deal generates revenues. These initial costs can impose a significant burden on the cash flow, which may make the need for financing even more urgent.

2. Contract Negotiations

Once the importer shows interest in dealing with the exporter, both parties begin negotiating a firm contract. Depending on the complexity of the product, contract negotiations require input from many professionals. A lawyer may be required to help negotiate terms and conditions that secure each party in the event of contract cancellation, non-performance and non-payment, among many other possible scenarios. At times, contract negotiations can take many months, if not years, to conclude. The time invested during this time is at the cost of each company with no compensation other than the hope that the contract with bring fruitful benefits to each company.

3. Manufacturing Cost Per Unit

In most cases, these costs are the same as those for domestic transactions, except where production is modified to meet specific foreign requirements. Coverage of these costs may fall under the company’s existing credit arrangements, unless the export effort is significantly large in comparison with the company’s current capacities. Some differences can occur with product cost per unit if the order is large enough, and special costs will therefore have to be borne. New employees, added export administration, extra factory space, and more expensive materials may be necessary. In that case, a new cash flow worksheet must be completed to factor in the additional costs relative to expected revenues.

Did you know that you can preview FITTskills courses for FREE? This topic is covered in the FITTskills Lite Unit on Cash Flow Management. Get the download below:

4. Labelling

This is one of the up-front costs incurred in exporting. If it’s done in-house, there will need to be special print runs and adjustments made to machinery, although the out-of-pocket costs may be minimal. For many overseas markets, they may need label information translated. If contracting out both translation and printing, the exporter can expect that payment for these services will be due within 30 to 60 days after the order is complete.

5. Packing

Shipments must be ready for international transportation. Many countries have strict regulations. Even if the packings done in-house, the exporting firm may have to purchase materials, such as crates, boards or Styrofoam. Payment for these materials will be within 30 to 60 days of delivery. If packings done by an external supplier, such as a freight forwarder, the costs will be even more significant. In some instances, it may be possible to secure extended payment terms from suppliers in recognition of the length of time that will pass before receivables are paid.

Want to learn more about methods of settlement in international trade and other risk mitigation options? Check out the FITTskills International Trade Finance online course.

6. Forwarding Agents Fees

The forwarding agent’s fees cover activities such as preparing documents, securing insurance and arranging for transportation. These fees are usually payable in 30 to 60 days after loading the shipment onto an international carrier. The timing of the costs may be negotiable, but the negotiation must finish before the transaction occurs.

7. Export Commissions

To earn an export commission the signing of an export transaction must occur, but payment terms may be negotiable. The exporting company should try to move the due date for payment of commissions either close to or past the date on which it expects to receive payment from the importer. If the company is factoring the transaction, however, it may be able to pay sooner without impairing cash flow.

8. Shipping and Storage Costs

The shipping process entails many costs, payable to a wide variety of service providers. Freight forwarders, domestic carriers, port authorities, and international carriers may all perform services requiring payment. As suppliers of shipping services are familiar with the realities of international trade, they may agree to payment terms that are common among domestic suppliers.

9. Cargo Insurance

This cost is payable within 30 to 60 days of shipment. Shippers may offer extended cargo insurance as part of their service and may thus accord extended payment terms for it. Otherwise, factor this cost into a transaction as being payable before receiving the full funds for deliverables. If packings done by an external supplier, such as a freight forwarder, the costs will be even more significant. It’s possible to secure extended payment terms from suppliers in recognition of time that will pass before paying for receivables.

10. Customs and Clearance Fees

Customs and clearance fees are due immediately on arrival of the shipment in the destination country. For customs brokers employed to clear the goods, those fees add to the other costs. If the contract specifies that the exporting firm is responsible for this part of the transaction, the firm will need cash on hand to cover these costs before the goods can be landed and delivered to their destination.

By keeping these costs in mind, an exporter will be able to work through the cash flow forecasts and ensure the cash inflows match the cash outflows as much as possible to minimize the company’s reliance on financing. This exercise can also help the company negotiate the milestone payments and ensure it follows the contract completion to minimize payment default in future.

Other Costs

The export costing calculation offers an indication of some of the other costs involved in a transaction. It also gives clues as to when they might affect the cash flow. For example, paid monthly for the duration of the transaction are insurance premiums. By contrast, you only feel the impact of discounting a receivable when the receivable sells.  Among other costs to consider are receivables insurance, contract cancellation insurance and various financing charges. When using a line of credit these might be paid monthly or at the end as part of the collection and settlement process.

The post 10 Export costs you need to consider when projecting cash outflows appeared first on Trade Ready.

International trade transactions involve considerable negotiation between sellers and buyers to determine which party will pay for transportation, cargo insurance and other costs associated with shipping goods, as well as who is responsible for the goods at any given time during shipping. Given differences in culture, language and government regulations, negotiations have the potential for confusion and misunderstandings, which could result in irresolvable disputes.

In 1936, as part of their work towards rules-based trade, the International Chamber of Commerce (ICC) created a system of standardized international trade terms, known as the Incoterms® system, that represents different methods of transportation and assumption of risk and cost between sellers and buyers.

The use of the Incoterms® system is for domestic and international trade and refers to the parties as gender-neutral buyers and sellers.

New Incoterms® 2020 rules come into effect soon

Since their inception, Incoterms® rules have undergone seven revisions in order to reflect the development of international trade. At the time of this publication, Incoterms® rules 2010 are in use, but new Incoterms® 2020 rules have been introduced and will come into effect on January 1, 2020.

Contracts made under Incoterms® 2010 rules remain valid even after 2019. It is recommended that you use Incoterms® 2020 rules after 2019, however, parties to a contract for the sale of goods can agree to choose any version of the Incoterms® rules. It is important however, to clearly specify the chosen version of Incoterms® rules, either 2020 or 2010. If using Incoterms® 2010 in the contract of sale, be sure to understand what the older terms mean.

What are Incoterms® rules?

Incoterms® rules are used in negotiations to resolve specific terms and conditions of sales contracts by addressing the following:

• Costs: Who is responsible for the expenses associated with a shipment at a specific point in the shipment’s journey, such as export packing costs, the main transport costs and custom duties?
• Risks: Who bears the risk of loss or damage to the shipment, i.e. who is responsible for the goods during transit?

Incoterms® 2020 rules clearly define the obligations and responsibilities related to the transport of goods for both the seller and buyer. Incoterms® 2020 rules should not be considered a contract of sales. They do not:

• Provide specific details of transfer points, transport, and delivery (must be defined in sales contract)
• Determine ownership or title transfer of the goods
• Determine payment terms
• Apply to intangible services
• Define contract rights or dispute processes
• Relate to goods before or after delivery
• Specify the types of document to be issued or what their content should be
• Provide default Incoterms® rule

It is worth noting that Incoterms® rules include the use of electronic data information systems for customs purposes and other documentation and information exchange. The terms also include customs requirements for security for specific types of goods including chain of custody documentation.

Although many reference tables suggest that buyers must buy cargo insurance, the Incoterms® rules do not specify insurance as a requirement, except for two Incoterms® rules: CIF and CIP require the seller to purchase cargo insurance for the benefit of the buyer, i.e. the buyer can make a claim for loss or damage directly to the insurance company. The rest of the terms do not require the seller to obtain cargo insurance, nor do the terms require the buyer to obtain insurance.

The decision to purchase cargo insurance is the responsibility of buyers. However, given the cost of replacement and the loss of profit should cargo be lost or damaged, it is generally in buyers’ interest to obtain cargo insurance. Organizations should consider the cost of insurance in a per-transaction basis versus the utilization of an umbrella insurance that can cover all of their shipments.

Each of the Incoterms® rules represents a different situation involving the domestic or international movement of goods. Incoterms® rules also deal with the documentation that is required for international trade because they specify which parties are responsible for producing each document. Because documentary requirements vary so much between countries, this specification is very helpful in facilitating trade transactions.

What are the different categories of Incoterms® rules?

There are two categories of Incoterms® rules:

• Rules for any mode or modes of transportation
• Rules for sea and inland waterway transportation

Each Incoterms® rule is referred to by three letter abbreviations, and are usually listed by category of transport. It is important to note that there are several charts with images for Incoterms® rules online, and they tend to have significant differences. The key to learning Incoterms® rules is not to memorize, but to interpret each of the rules. Depending on the shipment’s point of departure and point of arrival, and the modes of transportations used, rules might or might not apply.

The first letter of the abbreviation provides information on the focus of that group of terms:

• Terms beginning with the letter E indicate that the seller’s responsibilities are fulfilled when the goods are made available for shipping by the buyer’s chosen carrier. There is only one rule under the E term: EXW.
• Terms beginning with the letter F refer to shipments where the primary cost of shipping, or main carriage, is not paid for by the seller.
• Terms beginning with the letter C refer to shipments where the seller pays for a portion of the shipping, usually the pre-carriage and main carriage, but the seller’s responsibility ends when the goods are delivered to the carrier somewhere on the seller’s side.
• Terms beginning with the letter D are destination contract terms because the seller delivers somewhere on the buyer’s side. The shipper or seller’s responsibility ends when the goods arrive at a predefined point. Delivery on the buyer’s side means that recognition of payment is deferred. With these terms, the seller pays the pre-carriage, main carriage and onward carriage.

The post Read this Incoterms® overview to start preparing for the new Incoterms® 2020 updates appeared first on Trade Ready.

Delivery Factors Within a Transaction

Delivering goods and/or services within a country can be complex in certain situations. Sending goods and/or services across international boundaries is challenging even for large multinational corporations, and can be a daunting experience for many small-and-medium-sized companies.

When it comes to exporting goods, an exporter must know the route a shipment is to travel so that it can be prepared for any special needs or risks during shipping. An exporter must also be aware of all import and export regulations, other regulations affecting shipped goods, and what the conditions are like at the destination point.

Will a destination port receive containers? Will handling facilities be available? As it is not always easy to get answers to these questions, even experienced exporters will benefit from the assistance of experienced intermediaries.

Exporters of goods need to keep these seven services in mind when managing international deliveries, and budget accordingly, to take advantage of them when needed.

1. Freight Forwarders

Freight forwarding is a service industry that provides a wide range of advisory, administrative and physical services to shippers to aid the international movement of goods. Freight forwarding companies arrange for the transportation and delivery of goods and commodities.

Freight forwarders provide or arrange for packaging, storage, handling, export credits, insurance and trade documentation (which might include customs clearance). Other services freight forwarders offer include:

• Arranging or providing shipment handling requirements for packing, crating, marking, inspection and storage of shipped goods
• Preparing shipping and customs documents
• Translating, certifying or transmitting documents
• Obtaining permits, licences and certificates
• Providing financial assistance by helping companies arrange documentary letters of credit or arrange collections

2. Non-Vessel Operating Common Carriers (NVOCC)

Freight forwarders may be engaged by shippers as agents or as transportation intermediaries. As agents, forwarders charge a fee that includes payment for their services, plus the cost of the transportation services.

When acting as a transportation intermediary, the forwarder pays the carrier, regardless of whether there is enough cargo available to fill the space it has purchased.

In this role, the forwarder acts as a carrier and is therefore known as a non-vessel operating common carrier (NVOCC).

NVOCCs book space on cargo ships in large quantities at lower rates, and sell space to shippers in smaller amounts. NVOCCs consolidate small shipments into container loads that move under one bill of lading. In this capacity, the forwarder can also operate as a broker. It receives a percentage of transportation charges or brokerage fees from air, highway or ocean transportation companies for finding shippers with goods to be transported.

3. Trading Houses

Trading houses are international trading companies that specialize in helping companies import or export goods. International trading houses are commercial intermediaries that focus on the long-term development of trade in goods and services that are supplied by other parties. Trading houses concentrate on exporting, importing and third country trading as core activities.

4. Cargo Insurance

Insurance is necessary to avoid the risk of major financial losses if cargo is damaged or misplaced. In most cases, loss or damage occurs during loading and unloading or while cargo is being stored between transport stages. Cargo insurance is offered under ocean marine policies. Despite the name, ocean marine insurance can cover goods being transported by air, rail, road or by marine transport.

5. Requirements for Insurance

To obtain insurance, a company must demonstrate that it has insurable interest in the goods being transported. The company can only have insurable interest if it faces the risk of a loss, if it has a financial interest in the safety of the goods, and if it does not have the potential to profit by applying for insurance.

Cargo insurance is a negotiable, transferable document. It is important to know that insurance interest needs to be set before the time of the loss.

There are many types of insurance policies that a company can obtain to cover its insurable interest. Under any type of insurance policy, it is important to negotiate and obtain optimal coverage at competitive rates, and to be aware of the procedure by which claims must be filed.

6. Third Party Logistics Providers

Third party logistics (3PL) is a common supply chain management practice in which a company outsources logistics functions to another company. The functions that are outsourced vary from company to company, but usually include one or more of the following:

• Inbound freight
• Customs and freight consolidation
• Warehousing
• Order fulfillment
• Distribution
• Management of freight to customers

Using a 3PL company can enable an organization to enhance its customer service offerings because it can use the international distribution networks and insider knowledge of importing and exporting that have been established by the 3PL.

Using a 3PL is especially beneficial to medium-sized companies, helping them remain lean and competitive while receiving the most cost-effective services.

A smaller company might not benefit from using a 3PL because the company’s logistics structures might not be large enough to justify the commissions that the 3PL will charge to take over planning and managing the functions.

Get your products and services where they need to be faster than ever before, while still maintaining quality standards and meeting all legal requirements with the FITTskills International Distribution online workshop!

7. Risk Elements and Related Costs

Any arrangement with buyers and suppliers has elements of risk—however, risks associated with international trade are often higher. Commercial, country and foreign exchange risks all exist to varying degrees in international trade, and managing or eliminating these risks can be costly. Failure to address them adequately may eliminate all profit.

Discussions with banks, insurers and export credit agencies (ECAs), will be required to ascertain the cost of managing financial exposure after assessing the commercial and country risk factors.

Volatility is a reality in international transactions, and the impact of this will vary depending on the countries involved and the goods or commodities being bought or sold.

Commodity prices fluctuate daily, and while commercial contracts and/or guaranteed forms of payment will fix prices, extraordinary circumstances can sometimes add costs or present an opportunity for the importer to reduce the price paid.

Such extraordinary circumstances often lead to unforeseen costs and the risk of this is often difficult to accurately predict or to cost with precision. Consequences of a volatile target market include:

• Dispute resolution costs
• Demurrage charges (delays in loading or unloading vessel)
• Delays in transit
• Documentation errors or omissions
• Legal fees
• Delays in funds transfer
• Unanticipated costs due to travel or other expenses

The post 7 Delivery costs to budget for in your export strategy appeared first on Trade Ready.