The success of global trade is significantly influenced by the role the financial sector has in the logistics of international payments. Large commercial banks finance about 90% of international commerce transactions. This includes the issuing of letters of credit which guarantees payment by a bank until the transaction is finalized upon delivery.
This process begins when the seller and buyer negotiate an export contract that spells out price, amount and when and where the delivery of goods occurs.
The buyer will then request a letter of credit from his bank listing the seller as the beneficiary. The letter of credit is financed with a loan or from the buyer’s available bank funds. Standard procedures for the loan involve a down payment, line of credit and an interest rate tied to the buyer’s creditworthiness. Cargo Liability Insurance against risks from damage or delay is usually required. The bank charges a fee of 1% to 8% based on the value and complexity of the transaction.
A line of credit is available to the seller presenting the letter of credit to his bank. In addition, once a bill of lading is finalized, the seller can present it to his bank as further proof that he will be paid.
The seller confers the consignment to a shipper in exchange for a bill of lading. The bill of ladingfunctions as a title, contract of carriage and receipt for the goods. The seller hands off the consignment for transit to point of delivery. This transport chain may encompass port facilities, storage facilities and other intermodal transport vehicles.
Payment may occur at this point or may not occur until buyer assumes ownership after confirming that conditions of the contract have been fulfilled. The bill of lading is sent to the buyer’s bank for exchange of payment and then onto the buyer so that the goods can be claimed upon delivery.
Upon arrival at final destination, the buyer presents the bill of lading to the shipper to claim the goods. If the terms of the contract are determined to satisfied, often done by a third party, the seller can request final payment of the previously deposited funds from his bank.