International Trade (Intl Trade) 101: Payment Methods - Consignment Goods, Sent but Paid Only When Sold Risks and Benefits

What This Is

Consignment is a trade arrangement where a seller ships goods to a buyer, but payment is only made after the goods are sold. This arrangement is commonly used in international trade, particularly for high-value or perishable goods. For example, a US importer buys a shipment of electronics from a Chinese exporter on consignment. The Chinese exporter ships the goods to the US, but payment is only made after the electronics are sold to a US retailer.

Key Terms & Rules

• Consignment: A trade arrangement where a seller ships goods to a buyer, but payment is only made after the goods are sold.
• Incoterms: International commercial terms that define the responsibilities of buyers and sellers in international trade.
• UCP 600: Uniform Customs and Practice for Documentary Credits – governs LC transactions globally.
• LC (Letter of Credit): A financial instrument that guarantees payment to a seller upon presentation of compliant documents.
• DPU (Destination Port Unloaded): An Incoterm where the seller is responsible for delivering goods to the destination port, but not unloading them.
• FOB (Free on Board): An Incoterm where the seller is responsible for delivering goods on board a vessel, but not for main carriage.
• CIF (Cost, Insurance, and Freight): An Incoterm where the seller is responsible for delivering goods on board a vessel, including main carriage, insurance, and freight costs.
• UCP 600 Article 19: States that the beneficiary (seller) must present compliant documents to the issuing bank within the stipulated time frame to receive payment.

Step-by-Step Process

1. Agree on consignment terms: The buyer and seller must agree on the terms of the consignment, including the payment terms, pricing, and any other conditions.
2. Ship goods: The seller ships the goods to the buyer, but payment is only made after the goods are sold.
3. Sell goods: The buyer sells the goods to a third party, and the payment is made to the seller.
4. Settle payment: The buyer settles the payment with the seller, minus any agreed-upon commission or fees.

Common Mistakes

• Mistake: Assuming that consignment is the same as open account.
• Correction: Consignment is a specific trade arrangement where payment is only made after the goods are sold, whereas open account is a payment term where payment is made upon receipt of goods.
• Mistake: Confusing CIF and CIP Incoterms.
• Correction: CIF (Cost, Insurance, and Freight) includes main carriage, insurance, and freight costs, whereas CIP (Carriage and Insurance Paid to) only includes insurance and freight costs.
• Mistake: Misusing "free on board" with air freight.
• Correction: FOB (Free on Board) is typically used with sea or inland waterway transport, not air freight.

Exam / Certification Tips

• Tricky distinction: FOB vs FCA (Free Carrier) – FOB transfers risk when goods are on board the vessel, whereas FCA transfers risk when goods are handed over to the carrier.
• Confirmed vs unconfirmed LC: A confirmed LC is guaranteed by the issuing bank, whereas an unconfirmed LC is not.
• DPU successor to DAT (Delivered at Terminal): DPU is an Incoterm that replaces DAT.

Quick Practice Scenario

A Chinese exporter sells goods to a US importer on consignment. The Chinese exporter ships the goods to the US, but payment is only made after the goods are sold to a US retailer. Who bears the risk of loss or damage to the goods during transit?

Answer: The Chinese exporter bears the risk of loss or damage to the goods during transit, as the goods are still in their control until they are sold.

Last-Minute Cram Sheet

• Consignment: A trade arrangement where payment is only made after the goods are sold.
• Incoterms: International commercial terms that define the responsibilities of buyers and sellers in international trade.
• UCP 600: Uniform Customs and Practice for Documentary Credits – governs LC transactions globally.
• LC (Letter of Credit): A financial instrument that guarantees payment to a seller upon presentation of compliant documents.
• DPU (Destination Port Unloaded): An Incoterm where the seller is responsible for delivering goods to the destination port, but not unloading them.
• FOB (Free on Board): An Incoterm where the seller is responsible for delivering goods on board a vessel, but not for main carriage.
• CIF (Cost, Insurance, and Freight): An Incoterm where the seller is responsible for delivering goods on board a vessel, including main carriage, insurance, and freight costs.
• UCP 600 Article 19: States that the beneficiary (seller) must present compliant documents to the issuing bank within the stipulated time frame to receive payment.
• Under FOB, risk transfers when goods are on board the vessel – not at the port gate or on the dock.
• Consignment is not the same as open account.
• CIF includes main carriage, insurance, and freight costs, whereas CIP only includes insurance and freight costs.