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Differing Distributions of Responsibilty, Cost and Risk
The following diagram illustrates divisions of responsibility for arranging and paying for insurance, shipping  and packing under just one Incoterm, CIF Cost, Insurance and Freight (…named port of destination).


The exporter arranges for carriage and insurance of the goods up to Critical Point 1. The buyer arranges for carriage of the goods from this point onwards.

  • The exporter's risk ends at Critical Point 2, when goods pass over the ship's rail.
  • The exporter incurs the cost of carriage and insurance of the goods up to Critical Point 3.

Different Incoterms distribute responsibility, cost and risk differently between the exporter and his customer.

The following chart illustrates how costs and risks are distributed for all thirteen Incoterms. From the exporter’s point of view:

  • The least onerous Incoterm is “EXW Ex Works (…named place)” because his own obligations are at their least and his      customer must bear all costs and risks involved in removing the goods from the exporter’s premises at the place named
  • The most onerous Incoterm is “DDP Delivered Duty Paid (…named place of destination)” because his own obligations are at their greatest: he has to bear all the costs and risks of getting the goods to thedestination named (including getting any import licence required and handling customs formalities and all associated payments).
PDF Chart available here

Export payment options

Methods of receiving payment for exports

Non-payment is an acute problem in export trade because:

  • The buyer is overseas
  • The goods are usually overseas, and
  • It is difficult to get the goods back again.

Four main payment methods are used in export trade. They overcome these problems to differing degrees and in different ways, and each has different implications for the movement of:

  • Goods and services

  • Documents connected with the goods and services

  • The money due on the sale of goods and services.

The four main methods are:

  •   Advance payment

  •   Open account trading

  •   Collections

  •   Documentary Credits

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Advance payment

  •   The customer sends money first to the exporter.

  •   The exporter checks that the money has been received.

  •   The exporter sends the goods to the customer.

The exporter may request advance payment because (for example) he is unwilling to send unpaid-for goods to the buyer’s country because of some risk over payment. The buyer may agree to pay in advance because he wants to induce the exporter into an established relationship.

If advance payment is agreed, the buyer sends the payment before the exporter consigns the goods for delivery. The exporter sends off any documents that the buyer will need (e.g. original bills of lading, export licences) after he hands the goods to the carrier or carrier’s agent.

  •  Advantages: All in favour of the exporter.

  •  Disadvantages: All against the buyer. He has parted with his money and has no assurance of receiving goods.

Open account trading

  •   The exporter sends goods first to buyer (e.g. on Day 1).

  •   The customer sends money afterwards (e.g. on Day 30).

Open account trading requires payment at agreed intervals after the goods have been despatched to the buyer. It requires a more formal arrangement than is needed for advance payment because a longer and more permanent relationship between exporter and buyer is envisaged. The exporter despatches goods to the buyer and at the same time sends an invoice for those goods, for payment at an agreed date or after an agreed period.

Open account trading is also a common payment method used for:

  •  Goods bought by an overseas parent company from a subsidiary that sources goods for it

  •  Trade between established pairs of exporters and customers, both of whom operate in stable markets such as or the

Advantages: All in favour of the customer.

Disadvantages: All against the exporter. If the customer does not pay, or if he does pay but his country blocks remittance of funds to exporter:

  • The exporter has neither the goods nor the money, and

  •  The exporter may not get his goods back.



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