How shipping works in Trade Finance
An A to Z of shipping for international traders – how does it work and what are the issues?
Trade finance dominates international trade and is usually sought to fund the purchase/sale of any physical product that moves. Therefore it is important to understand the context of the sale and to look at the difficulties that could arise when products are being transported. Different funders work in different ways, as some decide to take care of logistics and process using their operations team, and others outsource work to freight companies.
Shipping is the main mode of transport that that is used when a product is moved, therefore it is important to look at the potential problems that could be encountered.
Potential difficulties when shipping goods
Some of the problems with shipping are outlined below:
- There may be inflexibility when trying to change routes
- Tracking of where the product is sometimes proves to be difficult, especially in relation to commodities being shipped from less developed countries
- There may be hidden charges in relation to duties and taxes
- When shipment is received there will be further transportation needed in order to transport goods from the port to the place of final buyer
- The rates in relation to basic freight are subject to currency and fuel charges (see our post on currency exposure and risk here: http://www.tradefinanceglobal.com/services/currency-exposure-and-risk-management/)
- The seller must check the creditworthiness of the end buyer if they are to release product before funds are sent. Alternatively, the right credit instrument must be used
- Maritime transport documents have to be completed and a dangerous goods declaration filled in where relevant
How to protect yourself?
We have outlined some of the considerations above when looking at shipping as a transportation option. However, a way to protect a shipment of goods could be by using insurance (see our post on credit insurance here: http://www.tradefinanceglobal.com/services/credit-insurance/).
It is important to look at all options available as it is advisable to have a policy in place that supplements the standard afforded to shippers under the maritime transport conventions (Hague-Visby and Hamburg rules).
What documents will be accepted?
Any consignments sent must be accompanied by a Bill of Lading (BL) or Sea Waybill (SW). These are documents of title and make clear who the consignment owner is and terms of the contract of carriage. When new business is started, it is standard that this is done by a BL. In order to know how many BLs to send or receive one must look at the contract governing the relationship and related transaction – it is usually 3 BLs that are sent. By using a BL, it provides documentary security and control; the product stays with the seller until they instruct otherwise.
Alternatively Sea Waybills are cheaper but provide less security of payment. They are usually used when the buyer and seller are on good terms.
It is important to understand the basic principles on which the shipping industry works when using trade finance as either a borrower or lender, as you can then prepare yourself with ways to mitigate risk. With over 90% of all trade being done on ships it is the most important mode of transport to understand in international trade.
This article was written by James Sinclair, a writer at Trade Finance Global.
Countries: South America and United Kingdom
Topics: Distribution, Export Packing, Getting Started, and Insurance & Risk