International Regulations/INCOTERMS

INCOTERMS
The Incoterms are internationally accepted commercial terms defining the respective roles of buyer and seller in the arrangement of transportation and other responsibilities and clarifying when the ownership of the merchandise transfers from seller to buyer. They are used in conjunction with sales agreements, payment terms and other methods of transacting sales. It is very important for an international manager to understand the relationship between Incoterms quoted in a transaction and their relationship to the payment terms that have been agreed to for the transaction, since risks may change for a buyer and/or seller when these issues are analyzed.

For example, if the seller agrees to open account payment terms of Net 90 days invoice date and quotes Incoterms of CFR port of destination, the seller’s commercial risk has increased significantly. Why? In this scenario the seller will not be paid until 90 days after the invoice date and, per the Incoterms, will cover the transportation costs and maintain ownership of the goods while in transit to the port of destination; however, the seller will not be responsible for insuring the goods. Should the product be damaged during shipment, the seller is relying on the buyer to pay for the goods and submit the insurance claim and wait for reimbursement, which could happen if the buyer and seller have a good relationship. However, the seller could loose everything in this situation – the goods and payment.

Specific Incoterms have application to timely payment. Some examples of Incoterms follow: