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Contents
1.0 Introduction.........................................................................................................................1

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 2.1 Evaluating the most appropriate method and term of payment...........................................1

2.2 Explaining relationship between cargo insurance and Incoterms 2020..........................3

3.0 Conclusion...............................................................................................................................5

4.0 References..............................................................................................................................6

1.0 Introduction

Certain method of payments and different type of insurance hold a significant position in

international trading as these things are the core section of the trading. The study will seek to

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explore different type of method and term of payment to find a suitable one for any exporter to

successfully conduct a transportation simultaneously minimizing the risks and analyze that

particular payment method. There will also be a brief discussion on the relationship between

cargo insurance and incoterms 2020 by analyzing both of the policies and figuring out the

similar sections of both.

2.1 Evaluating the most appropriate method and term of payment

Credit assessment or also defined as credit check is commonly known as evaluating the

condition of a contractor or a company on their solvency or delivering what was promised that is

fulfilling their end of the bargain. It is basically assessing the contracting party on whether they

can repay at the time of transaction. Now when it comes to exporters, they certainly have to

follow credit assessments before they start agreeing with a term or method of payment (Bishop,

2009). There are certain things to consider here for the exporters like commercial and political

risk factors and an appropriate payment method. For this study where the commercial risk is low

and political risk is high the most suitable method and term of payment will obligingly be letters

of credit because in this method there will be a letter from the bank stating that the importer’s

payment to an exporter will be sent just in time and in full that is what was agreed and this is

considered to be one of the most secured payment methods in international trade (Carr and

Stone, 2017). Now here the condition was that the commercial risk is low but political risk is high

in which case a person may not be able to complete the transaction in time but in the method of

letters of credit or credit letter it falls into the responsibility of a bank to deliver the money in time

and it would be easy for the bank if they have a branch near the exporter or it can be an

international transaction. This is the reason why this method is being chosen for the given

situation.

There are various types of benefits which can be embraced by the exporter using this payment

method. The minimization of credit risks has to be the biggest advantage of an exporter in this

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case because in the import export business the distance among buyers and exporters is very far

which may create the threat of credit worthiness. If the conditions are met which is provided in

the letter of credit, then the buyers do not possess the privilege of denying the transaction

complaining about the quality of goods because the terms and conditions are on paperwork

which is a major advantage for the exporter (Casson, 2016). There are situations where the

buyers may delay or hold the transaction but this is definitely not the case in this payment

method. The security of the payment method is without a doubt unquestionable which opens the

opportunity for exporters to think of the next few or more steps in their business and strengthen

their business world. Overall, the payment method is the most suitable under given condition as

it ascertains security and as everything is lucid as water and easy process it is time efficient and

energy efficient for exporter.

There are even different types of letter of credits that may have different advantages and

disadvantages and an exporter can choose any suitable methods which would align with their

needs and characteristics. There is standby letter of credit in which there is an option where the

exporter may get compensation if something is not right and it may be the buyer’s problem like

their political instability (Sherlock and Reuvid, 2010). Then there are confirmed letter of credit

where a bank may act on behalf of the buyer as the middle man but the exporter may not trust

the bank which is why the exporter may demand a known bank or a bank in their region to

confirm the letter of credit and in this way the exporter will receive the payment from regional

bank even if buyer’s bank will fail to comply (Davies and Freebury, 2017). There are many other

letters of credit options like back-to-back LCs, revolving LCs, slight LCs, Deferred payment LCs,

Red clause LCs and finally Irrevocable LCs. Among all of these letter of credits methods the

most suitable one for the exporter will certainly be confirmed letter of credit because the given

situation is that there may be a little commercial risk but high political risk and in this situation an

exporter may not be able to trust the bank that represents the buyer which is why for further

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security reasons the exporter will require confirmation from a regional bank that is trusted and

confirmed LC will surely offer that chance which is why this would be the appropriate method

and terms of payment.

2.2 Explaining relationship between cargo insurance and Incoterms 2020

Cargo insurance or also widely known as freight insurance has a humongous significance in

international trading as it indicates that during a shipment (by air, sea or land) if there is any

external cause which may damage the cargo or cause physical damage it will be covered by

cargo insurance. On the other hand, the Incoterms which was originally published by

International Chamber of Commerce (ICC) in 1936 and the last update was Incoterms 2020

which came in practice from January 1, 2020. Intercoms basically is the terms of conditions that

is agreed upon by buyers and sellers while making an international trade and the rules are even

conceded by governments and all the legal authorities involved with the transactions (Demir,

2014). Incoterms 2020 has 11 terms of which 7 are made for any type of transportation. These

include EXW, FCA, FAS, FOB, CFR, CIF, CPT, CIP, DAP, DPU and DDP.

To figure out the relationship between cargo insurance and Incoterms 2020 a diaphanous

overview of the two sectors is required to be discussed.

Cargo insurance

To minimize the risk of importing and exporting there is no exception than cargo insurance

because it provides that level of security. Cargo insurance enables the exporter to cover the

loss or damage that is caused by conflict, civil war, revolution that is industrial or other, rebellion

of any sorts, civil strife or any type of adverse act, capturing of the cargo, seizure of whole or

part of the shipment, arrest, restraint detainment, general salvage charges, strikes, riots, etc.

(Grath, 2016). Most of the import export approximately 90% of them all is transited through sea

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and by using containers and sometimes due to bad packaging or any natural disasters the

goods are damaged and this is when the significance of cargo insurance is comprehended by

the exporter or importer because every time of importing or exporting, they have to invest a

huge amount of money on the service. The packaging damages, infestation, abandonment of

the cargo, rejection from customs, dishonesty of the employee’s weather damages and thefts

are covered by the insurance and there is even different type of cargo insurance such as All

risk, FPA (Free of particular average) and shipment by shipment. So, the significance of cargo

insurance in international trading is huge without any doubt.

Incoterms 2020

The terms discussed in the Incoterms 2020 clearly provides a notion of how any mode of

transport may take place and there is a section for insurance of the freight in the terms. Two of

the terms will be discussed here to demonstrate the relationship between Incoterms 2020 and

cargo insurance and the terms are CIF (Cost, Insurance and Freight) and CIP (Carriage and

Insurance paid to). The first one states that the buyer will get a minimum cover for the damage

done to the goods after it is shipped and if the buyer desire to have more than that other

arrangements are required to be made (Lin and Hinson, 2018). The CIF protection is quite

helpful for minimum coverage for buyers. The second one that is quite similar to the first one

and here seller has the responsibility to ascertain a contract for insurance for the risk of buyer.

So, the relationship between cargo insurance and Incoterms 2020 is basically on the insurance

cover on both of the sectors and in international trading business where 90% of the whole

transportation is occurred through sea, having a good insurance is always mandatory (Reinsdorf

and Slaughter, 2014). Both of the sectors try to assure better coverage for the loss of

commodities for the buyers and the buyers can even build their future plans as they do not have

to think about the damage or any other external issues faced by the shipment and this clearly

demonstrates the relationship between cargo insurance and incoterms 2020.

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3.0 Conclusion

Terms of payment and insurance are two of the most significant things in international trading

because the payment method has to be secure to conduct business abroad and the exporters

are needed to be assured of the fact that the payment of contract will be delivered to them

(Walker, 2018). For this the best payment method according to the author is letters of credit and

of the different LCs, confirmed LC is the best one for any exporter because with it they will have

certainty of getting paid in time and in full. The next one is insurance of a product delivered and

this is very much important for buyers because they also require certainty that if there is a

damage of any products then it will be covered by insurance and cargo insurance or Incoterms

2020 can help in the process.

4.0 References

Bishop, E., 2009. Finance of international trade. Amsterdam [etc.]: Elsevier Butterworth-

Heinemann.

Carr, I. and Stone, P., 2017. International trade law.

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Casson, M., 2016. The Theory of International Business.

Davies, G. and Freebury, C., 2017. The management of documentation by British

exporters. International Journal of Physical Distribution & Materials Management.

Demir, B., 2014. Trade financing: Challenges for developing-country exporters.

Grath, A., 2016. The handbook of international trade and finance. London [etc.]: Kogan Page.

Lin, B. and Hinson, W., 2018. Exporting assistance and guidelines for exporters.

Reinsdorf, M. and Slaughter, M., 2014. International Trade in Services and Intangibles in the

Era of Globalization.

Sherlock, J. and Reuvid, J., 2010. The handbook of international trade. London: Kogan Page.

Walker, A., 2018. International trade procedures and management. Oxford: Butterworth-

Heinemann.