A guide to trade documentation: financial documents

It’s vital that importers and exporters understand the importance of the documentation associated with an international trade transaction.

Whether it’s in its traditional paper form or in its modern, automated e-commerce equivalent. This section of our guide explains the purpose and significance of the main documents.

Correct completion and use of all the required trade documents is essential to successful exporting and importing. Some documents are specified as required by the commercial contract, and others may be required during transportation or to meet government requirements. All of these documents must be completed correctly and consistently in order to ensure that the goods are not delayed, because of incorrect or inadequate paperwork, and that payments are promptly and properly made. Institutions offering trade finance will often want to see documents that relate to legal as well as contract requirements.

Both exporters and importers are responsible for making sure that the commercial contract stipulates appropriate documents that each can reasonably be expected to provide. (For instance, if the contract stipulates that the exporter must present a document that the importer holds, trouble will certainly follow.)

The exporter will normally provide the commercial invoice and the packing list, and (if they make the transport arrangements) will also provide transportation documents. Some importing countries also require certain goods to be accompanied by special certificates, which the exporter will have to provide or obtain.

The importer will normally complete the documents required to license imports and clear them inwards through Customs.

Either side may be responsible for arranging insurance and providing the appropriate documents.

Financial documents

The two main financial instruments are bills of exchange and promissory notes. Both are negotiable, so that they can be used to raise finance.

Bill of exchange
A bill of exchange (also known as a draft or bill) is an unconditional written order drawn up and signed by the exporter (the drawer) requiring the person to whom it is addressed (the drawee) to pay a specified sum at a specified time to – or “to the order of” – a named payee. It is effectively a demand for payment in a form that is recognised and understood by banks, traders and courts throughout the world (although, in some countries, there may be fiscal restraints on the issue of bills). As such, it carries certain legal rights. Special forms are available, but the bill can simply be computer-printed on plain paper or a company letterhead.

The drawee will be specified in any Documentary Letters of Credit involved in the transaction. The Documentary Letters of Credit may also specify that the bill be marked “Drawn under Documentary Credit number… of (the issuing bank)”. These details must be adhered to in order not to prejudice payment.

A sight bill is payable on demand. A term bill is payable on a given date (“at a fixed time”) or at a given interval (e.g. 60 days) after it is presented (“a determinable future time”).

The exporter can have payment made to their own order, i.e. the payee is “ourselves”. In this case, the exporter must sign the document on the back, endorsing it either “in blank” or in favour of another party, e.g. the bank.

Promissory note
A promissory note is written by the importer (the maker) in favour of the exporter (the payee or beneficiary) or the bearer. It is an unconditional promise to pay a specified sum at a specified time to – or “to the order of” – a named payee or the bearer. The drawer may specify a given date (“at a fixed time”) or one that can clearly be calculated (“a determinable future time”).

Additional documents you may need to be familiar with:

Commercial invoice
The invoice is the starting point for the production of all the documentation an exporter must produce, and other documents will use information shown on the invoice. For importers, the invoice comes at the end of the chain and reflects the goods you will have received. The invoice must be produced by the exporter and must carry authoritative information. Depending on the goods and destination, certain information must be included on the invoice, e.g. the customer’s VAT details (if the destination is in the EU), or special declarations required by authorities during transit or in the destination country. The invoice must sometimes be certified or legalised by a third party.

The invoice also has several functions over and above requesting payment:

• it is required to accompany the shipment, even when the goods are being sent free of charge (e.g. as with trial samples)
• it is a master document that helps to identify the shipment and its contents
• it is the exporter’s declaration of the value of the goods.

A pro-forma invoice is sometimes needed in advance of shipment. It acts as a quotation, and enables the customer to apply for an import licence, draw up a Letter of Credit, or get foreign exchange to pay for the goods. It looks essentially the same as a commercial invoice. The pro-forma represents an offer that can be legally binding in most countries: acceptance by your customer makes you party to a valid contract. It is advisable to state it clearly that the offer has a defined expiry date and/or that prices are subject to change without notice. Prices quoted should also be according to agreed terms of shipment, ideally Incoterms® 2010. The terms of payment should also be specified.

Some destination countries require completion of a consular invoice or certificate (a standard form prepared by the destination country) – usually in addition to your standard commercial invoice. You must normally present the consular invoice to the destination country’s UK embassy before shipping the goods, however, your local Chamber of Commerce can help advise. Consular invoices involve important factors of time and cost: the procedure will usually take at least five working days, and the embassy will charge for its services – either a flat fee or one proportional to the value of the invoice. The charges can make an impact on your margins, so you should check their cost before quoting your customer.

Ideally, you should use the customer’s own language on his invoice, but this is not always practical. English is used increasingly throughout the world, and invoices written in English alone will be accepted in many countries. However, the destination country’s culture must guide your decision, and for some destination countries the invoice must be produced in that country’s own language.

Insurance documents

Responsibility for insurance may be split between exporter and importer or be borne entirely by one party or other (See page 19 for more on responsibility and Incoterms®). The actual requirements should be specified in the contract terms. Even if insurance appears not to be specifically mentioned, the various terms of Incoterms® 2010 specify which party is responsible for a particular risk, and to what point in transportation. The exporter can agree to arrange insurance for which the importer is responsible under a particular term, and may even agree to pay for the insurance; if so, this must be specifically noted in the contract. Similarly, and with the same proviso, the importer can agree to arrange the exporter’s insurance or even to bear the exporter’s risk.

Cargo insurance is normally subject to standard clauses known as “Institute Cargo Clauses”, a standard set of provisions recognised throughout the UK insurance industry, and, in fact, throughout the world. (Some countries use them “as is”, while others follow them very closely.) The English Institute Cargo Clauses are subject to English Law and jurisdiction.

Packing list

A packing list can assist in the carriage and handling of goods, especially in larger shipments of mixed items. It will also allow Customs authorities to work faster when they need to call for physical examination of certain specific items. If part of the shipment gets lost or damaged, the packing list helps to identify quickly and accurately which goods are affected. Finally, a packing list may be a formal requirement of a Letter of Credit, in which case it should state the shipment covered.

A packing list usually shows the following information: markings; number and type (e.g. cartons, crates) of packages; contents; and gross weight and dimensions. For simple consignments, all the relevant information can usually be included on the commercial invoice.
This article is the first part of a guide to international trade documentation. The second part of the guide is available here:
A guide to trade documentation: transport documents

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