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An INCOTERM is a business term for transaction, which is a short name of : International Commerce Terms. It is the definition of costs (of transportation for instance), between contracting parties (buyer, seller etc…), and the risks. It helps business parties to agree on who is responsible for what, when, how. But it doesn’t define the transfer the property, which is actually done only, when the payment is fully received.

An Incoterm defines, who is in charge of the costs of transportation and the risks, from the seller’s warehouse, to the buyer’s destination. The seller must take all these extra costs in consideration, and he can include in full or in part, in the final price of the goods sold. INCOTERMS are used for all commercial transactions, nationwide and for international.

There are 11 INCOTERMS TODAY IN 2020, which define the share of risks and costs between buyer and seller, defined by the International Chamber of Commerce.

There are four groups of Incoterms :

  • Incoterms starting with E.
    These are Incoterms at the beginning, at the departure of goods, the buyer handles everything, the seller just needs to have the good available for take away. We call it, EXW (EXWORK).
  • Incoterms starting with F.
    For these Incoterms, the principal transport is not the responsibility of the seller, the buyer is in full responsibility of it. Parties just have to agree where to load the goods, at the seller’s airport or seaport,etc… (FOB, FCA, FAS…)
  • Incoterms starting with C.
    All these explain that the seller is in charge of all transportation fees, from his production site or warehouse, to the destination of reception of the buyer. We use the following for exemple, CIF, CIP, CPT.
  • Incoterms starting with D.
    Also called Arrival Incoterms, because, the buyer is doing nothing, but, wait the delivery at his destination. Everything is handled by the seller, and at his charge. He may use DAP, DPU, DDP.

EXW : Ex Work
FAS : Free Alongside Ship
FCA : Free Carrier Alongside
FOB : Free On Board
CIP : Carriage & Insurance Paid To
CPT : Carriage Paid To
CIF : Cost Insurance & Freight
CFR : Cost and Freight
DDP : Delivery Duty Paid
DPU : Delivered at Place Unloaded
DAP : Delivered At Place


A bank guarantee, is a commercial paper, issued by a bank for his client to the destination of the counterpart in business. The issuing bank, ensures that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it. A bank guarantee enables the customer, or debtor, to acquire goods, buy equipment or draw down a loan. A payment guarantee assures a seller the purchase price is paid on a set date.

The advance payment guarantee, acts as collateral for reimbursing advance payment from the buyer if the seller does not supply the specified goods per the contract, also the credit security bond serves as collateral for repaying a loan. A confirmed payment order is an irrevocable obligation where the bank pays the beneficiary a set amount on a given date on the client’s behalf.

Another very usefull tool, the Performance bond. It serves as collateral for the buyer’s costs incurred if services or goods are not provided as agreed in the contract. A warranty bond serves as collateral ensuring ordered goods are delivered as agreed.

Letter of Credit

Sometimes referred to as a documentary credit, a letter of credit acts as a promissory note from a financial institution—usually a bank. It guarantees a buyer's payment to a seller or a borrower's payment to a lender will be received on time and for the full amount. It also states that if the buyer can't make a payment on the purchase, the bank will cover the full or remaining amount owed. It represents an obligation taken on by a bank to make a payment once certain criteria are met. After these terms are completed and confirmed, the bank will transfer the funds. The letter of credit ensures the payment will be made as long as the services are performed. The letter of credit basically substitutes the bank's credit for that of its client, ensuring correct and timely payment.

The bank issuing the letter of credit holds payment on behalf of the buyer until it receives confirmation that the goods in the transaction have been shipped. After the goods have been shipped, the bank would pay the wholesaler its due as long as the terms of the sales contract are met, such as delivery before a certain time or confirmation from the buyer that the goods were received undamaged. Letters of credit also vary based on the need for them.

 irrevocable letter of credit ensures the buyer is obligated to the seller.

 confirmed letter of credit comes from a second bank, which guarantees the letter when the first one has questionable credit. The confirming bank ensures payment in the event the company or issuing bank default on their obligations.

 import letter of credit allows importers to make payments immediately by providing them with a short-term cash advance.

 export letter of credit lets the buyer's bank know it must pay the seller, provided all the conditions of the contract are met.

 revolving letter of credit lets customers make draws within limits during a certain time period.

A standby letter of credit, commonly referred to as an SBLC or LOC, is a written obligation of the bank issuing the letter of credit stating that the bank will pay the beneficiary of the letter of credit in the event that the bank's customer, the applicant for the SBLC, fails to pay the beneficiary money due him from the applicant. Essentially, the SBLC is a form of backup payment insurance designed to guarantee that the seller in a transaction receives the money due him from the buyer. It is payable to the beneficiary, in accord with the terms of the SBLC, upon demand, and the issuing bank cannot refuse to make payment due to any disagreements between the applicant and the beneficiary