Trade finance fundamentals and documentation
Domain scope
Trade finance fundamentals and documentation tests whether you can map a transaction to an instrument and a compliant document set. Financing follows risk: advance payment shifts risk to the buyer, open account to the seller, and letters of credit or collections place banks and documents between them.
Core rules and document set
- Main instruments: advance payment, open account, documentary collection, documentary credit, guarantee and standby.
- A bill of lading consigned to order is a document of title and must be endorsed; an airway bill is not negotiable.
- Typical documents: commercial invoice, packing list, transport document, insurance certificate and certificate of origin.
- Incoterms allocate delivery, cost and risk. They do not set payment terms, govern title, or override credit terms.
- Documents must be consistent with one another. Data need not be identical, but must not conflict.
Worked example
An exporter ships FOB and presents a credit requiring a full set of clean on board ocean bills of lading consigned to order of the issuing bank. The bill shows freight collect and is consigned to the buyer. Freight collect fits FOB, but the consignee conflicts with the credit. The bank may refuse. The bill should be consigned to order of the issuing bank, endorsed correctly, and show a notify party matching the credit.
Traps that cost marks
- Treating Incoterms as payment terms.
- Assuming an airway bill gives title to goods.
- Missing endorsement on an order bill of lading.
- Ignoring insurance currency or the required minimum percentage.
- Confusing clean with freight prepaid.