In international trade transactions, An importer generally needs a bill of lading and a few other shipping documents to collect goods from the destination port. The bill of lading is issued by the shipping company to the exporter once the shipping company has inspected the goods. The exporter sends out the BL and other documents to the importer as presentation of these documents is a prerequisite for collection of the goods.
Sometimes, there might be a delay in delivering the documents to the importer, or the documents could get lost in transit. In such cases, the importer can approach a bank to secure a Shipping guarantee to help them receive the goods and move them out of the port.
What Is a Shipping Guarantee?
A shipping guarantee is a facility that helps importers obtain goods that arrive at the port before the original documents do. When the vessel carrying the goods arrives earlier than the shipping documents, the importer will have to wait for the shipping documents to clear custom duties and other formalities. Importers incur heavy demurrage charges when the containers are left in the port beyond the allotted free time. A delay in the arrival of the shipment’s bill of lading and other shipping documents will lead to higher demurrage charges for the importer.
To avoid demurrage charges, importers can approach a bank for a shipping guarantee. The bank issues the shipping guarantee to the importer against a line of credit and agrees to bear joint liability for the cargo. Importers can present the shipping guarantee to move the goods from the port to their warehouse without presenting the bill of lading. This lowers the cost from demurrage charges and loss of goods in the case of perishable items.
What Are the Benefits of a Shipping Guarantee?
- Reduce unnecessary demurrage costs
Using a shipping guarantee, importers can move the goods out of the port and complete customs clearance formalities without the shipping documents. This enables them to lower total demurrage costs, which are charged on a per container and per day basis after crossing the free time.
- Avoid delays and missed business opportunities
Importers do not have to wait for shipping documents; they can use a shipping guarantee to move the goods to their warehouse and grab market opportunities by reselling them or using them in manufacturing operations. A shipping guarantee will minimize delays in the supply chain and importers will not miss any business opportunities.
- Improve cash flow
As the shipping guarantee enables importers to pick up the goods before making payment and furnishing the original documents, they can begin the sales or production process using the shipped goods. Around the time the importers receive the original shipping documents, they will have enough liquidity to complete the payment for the goods. This will relieve working capital issues for the importer and improve cash flow management.
Also Read: The Different Types of Letter of Credit Used in Import-Export
Who Can Issue a Shipping Guarantee?
The importer’s bank or the issuing bank for the letter of credit can issue a shipping guarantee. The importer needs to have a credit line with the bank to issue this document. After the importer’s bank receives the original shipping documents from the exporter’s bank, the importer’s bank hands over the bill of lading and other shipping documents to the importer in exchange for the shipping guarantee.
Bank Requirements for a Shipping Guarantee
The following conditions need to be met to apply for a shipping guarantee:
- The business license of the importing business has to be legally approved and registered with valid certifications to prove the legitimacy and scope of their operation.
- The settlement for the shipping of goods has to be done by letter of credit.
- The importer needs to maintain a credit line or have a single credit extension approved by the issuing bank.
- The importer needs to submit the application for a shipping guarantee and copies of the commercial invoice and bill of lading.
- The importer also needs to submit an agreement accepting all possible discrepancies in the presentation of documents.
- The importer has to submit an undertaking stating that they will return the original shipping guarantee duly discharged by the carrier upon receipt of the original bill of lading.
Shipping Guarantee Process
The process of applying for a shipping guarantee begins when the importer realizes that the shipment is bound to reach the destination port before the arrival of shipping documents. The process is as follows:
- The importer submits the application for a shipping guarantee to their banking institution with whom they have maintained a credit line.
- After reviewing the application and copy of the invoice and bill of lading, the bank issues the shipping guarantee to the importer.
- Using the shipping guarantee, the importer picks up the goods from the carrier, clears customs formalities, and moves the cargo to their warehouse.
- When the shipping documents arrive at the importer’s bank, the bank reviews the documents and hands them over to the importer.
- The importer substitutes the shipping guarantee with the original bill of lading at the shipping company.
- The importer then returns the original shipping guarantee to the issuing bank.
What Happens When the Original Documents Are Lost in Transit?
If the documents are not delayed but have been lost during transportation, importers can request for a shipping guarantee but will have to submit additional documents. The importers need to furnish following extra documents in case of the shipping documents are lost:
- Letter from shipper - written statement detailing the circumstances in which the bill of lading was lost
- Court Order - legal order issued against a surety bond that directs the carrier or shipping company to deliver the goods to the importer.
- Letter of Indemnity - letter releasing the carrier from liability under the terms of the original bill of lading.
How Can Importers Obtain a Duplicate Bill of Lading?
The importers require a copy of the bill of lading when applying for a shipping guarantee. They need to request the shipping company for a duplicate set of the original bill of lading. The shipping company will require a letter of indemnity releasing them from liability if the original set of bills are found. This indemnity bond is held against a fixed amount set by the shipping company.
Also Read: Bank Guarantee Vs Letter of Credit - Examples and Differences
What Is the Difference Between a Bank Guarantee and a Shipping Guarantee?
Bank guarantees are issued to minimize financial losses in case any party in a trade transaction is unable to perform their duties. On the other hand, shipping guarantees allow the shipping line to hand over goods to an importer or a notified party when a bill of lading is not presented.
Importers can request a bank guarantee from the exporter to secure a bid. If the exporter doesn’t fulfill the contractual obligations specified in the bid, the importer will be reimbursed by the bank. Similarly, an exporter can request a bank guarantee from the importer to protect themselves against non-payment. If the importer is unable to complete the payment, the bank can step in on their behalf to make the payment to the exporters.
A shipping guarantee, while provided by a bank, is not the same as a bank guarantee. It is issued to the importer to obtain shipments arriving at the port before any documents are received by the importer.
Both facilities enable a seamless trading process. While bank guarantees can be requested by either party in a trade transaction, shipping guarantees can only be requested by the importers.
A shipping guarantee is an important facility for importers to accelerate the process of receiving goods and reduce costs incurred due to delays. This facility helps importers avoid missing out on market opportunities fuelled due to demand or seasonality and maintain cash flow for their businesses.
