• The primary is market demand.  Traditionally from Dec through April for imports, especially from Asia to the U.S., it is called the “slow season.” Because the retail market slows down after Christmas.  However from mid January through early February there is an upsurge of cargo moving to beat the Chinese New Year deadline whereby factories all over China shut down for weeks.  This usually keeps rates high as there is always space problems for cargo getting on vessels.  From May through November this would be the “peak season” where there is a big demand for cargo moving into the U.S., so the Carriers raise the rates during this period, with the GRI (general rate increase), and PSS (peak season surcharge).

• Another factor is fuel, or what is called the Bunker Fuel factor.  This is a floating surcharge that the Carrier’s can change when oil prices rise or fall. It is called the BAF.
• • Another factor is when the Carrier has increases in costs such as when Terminal costs rise, especially with Unions, congestion problems, etc. Or when the U.S Rail costs increase for similar reasons.  This is where the Carriers can add in new surcharges which have happened in the past and eventually get absorbed into the “all in ” rate quoted.
  • Most recently the primary reason for rate increases, was a knee jerk response to the tremendous downturn in traffic and volume as a result of the current U.S. recession since ’08.  This downturn caused many carriers to lose about 50% of their previous volume and while their costs remained the same or higher, and their revenue all but disappeared, they found themselves the beginning of this year looking at an average of $500, 000,000 in losses per Carrier.  So from late ’09 until May of ’10, most Carriers put a large portion of their fleet out of commission off the coast of Singapore.  Thereby creating a vessel shortage, or a false space problem.  This gave them all excuse to raise their rates again, in order to salvage their businesses.  This type of thing is not normal.

Four essential import and export freight payment methods

Below are the four essential freight payment methods most importers and exporters use.

Cash against goods

Like most shipments, this type of payment is governed by a bill of exchange. A bill of exchange is a non-interest-bearing written order used primarily in international trade that binds one party to pay a fixed sum of money to another party at a predetermined future date.

In simple terms – it’s a check that describes a transaction and what’s to be paid.

Now, what happens in a cash against goods (CAG) import is that the exporter relinquishes all control over the goods when they’re shipped. In order to protect the exporter, the importer’s bank will guarantee the shipment by agreeing to pay for the goods outlined by the bill of exchange. Essentially, the importer’s bank becomes liable to the exporter upon receipt of the goods.

Cash against documents

Like the previous method, this one hinges on the bill of exchange. This is a very common importing payment method, and in many ways, is virtually identical to the CAG.

In this freight payment method, the exporter gives the importer’s bank control. The bank is allowed to release the shipment and associated documents only upon their receipt of payment from the importer. So basically, you ship a load of widgets to a company overseas. That company pays their bank, and their bank pays you. Only then do they get to take possession of their container(s).

Cash in advance

This is probably the simplest form of transaction – as you might expect. Basically, the importer pre-pays for their shipment. It’s as simple as that. Of course, this type of payment arrangement is very much based on your relationship with the person on the other side of the international border.

Letters of credit

Letters of credit are very common. They work very much like a credit card. For example, somebody overseas orders three container loads of widgets from you. This importer gets a letter of credit from their bank and then sends it to your bank. You then ship the goods. When the importer receives them, your bank pays you.

Of course, letters of credit (L/C) aren’t quite that simple. They must contain certain items and documents, such as:

• Product numbers
• Shipping terms
• All transaction information
• Quality control methods

They depend upon the bill of lading

For more in-depth information on how letters of credit work, read our dedicated Letter of Credit blog.

Type of letters of credits as freight payment methods

Like most things involving the import and export of goods, letters of credit aren’t a single instrument. There are, in fact, many different kinds. Let’s briefly review and define them for you.

Revocable
The buyer or the bank that issued the L/C can make changes without informing the seller. Of course, pretty much all L/C’s are irrevocable now, making this form obsolete – but not 100%

Irrevocable
Any changes made must be approved by the beneficiary – the seller.

Confirmed
When a second bank also agrees to back the L/C.

Unconfirmed
This type doesn’t acquire the second bank’s approval.

Deferred
As you might expect, this form of L/C allows the buyer to defer payment for a time – sort of a letter of credit on credit, if you will.

Sight – or “at site”
When the issuing bank immediately pays the seller upon inspection of their carrier documents.

Mixed Payment
This is a form of L/C where the seller and buyer agree to more than one form of payment.

Acceptance
Payment is made upon the buyer’s acceptance of the goods being shipped.

Standby
In essence, this is a backup payment method.

Revolving
This is an open L/C that can be used across more than one shipping transaction.

Red Clause
Before shipping the product, the seller is allowed to take the pre-paid part of the total payment.

Transferable
This L/C can be assigned to a third party without endangering the transaction.

Back-to-Back
It’s a pair of L/C’s that allows a seller who cannot provide the goods for a specified reason to get paid. For example, a middle-man company that handles the actual shipment.