2.1 Documents used in distribution

Distribution documents are the written or electronic records that go with goods from the seller's store to the buyer. They state what is being sent, who sends and receives it, how it is carried, what it costs and who owns it at each stage. Without correct documents a consignment can be held at a border or port, refused by the customer, or left uninsured, and the seller may not be paid.

The documents serve four broad purposes: they are a request for payment (invoices, freight notes), evidence of the contract of carriage and receipt of goods by the carrier (bill of lading, airway bill), evidence for customs and other authorities (certificate of origin, cargo manifest), and a means of securing payment between parties who do not know each other (letter of credit).

Example: a manufacturer of packaged cooking oil in Nairobi exporting to a buyer in Kigali may prepare a commercial invoice, a certificate of origin for preferential duty under the East African Community rules, and a road consignment note, while its bank handles a letter of credit opened by the buyer.

2.1.1 Invoices

An invoice is a document sent by the seller to the buyer stating the goods supplied, their quantities and prices, the total amount payable and the terms of payment. In distribution it is both a request for payment and a record of the sale that the buyer checks against the order and the goods received. A correct invoice is also needed by customs officers to value goods for duty and by the buyer's accounts office before payment is made.

Types of invoices

• Pro forma invoice: A preliminary invoice sent before goods are dispatched, showing what the goods will cost. The buyer uses it to arrange payment in advance, apply for an import permit or open a letter of credit. It is not a demand for payment.
• Commercial invoice: The final invoice for goods actually sent. In international trade it is the main document customs uses to value goods and work out duty and taxes.
• Tax invoice: An invoice that shows value added tax (VAT) separately and carries the seller's tax details. In Kenya, tax invoices are issued through the Kenya Revenue Authority's electronic Tax Invoice Management System (eTIMS).
• Consular invoice: An invoice certified by the consulate of the importing country in the exporter's country, required by some importing countries to confirm the value and origin of goods.
• Customs invoice: An invoice on a form prescribed by the importing country's customs authority.
• Credit note and debit note: Not invoices themselves, but documents that correct an invoice: a credit note reduces the amount owed (for goods returned, overcharges or short delivery) and a debit note increases it (for undercharges).

Uses of the invoice in distribution

• Billing: It tells the buyer how much to pay, by when and how.
• Checking: The buyer's stores compare it with the order and the goods received note before the invoice is passed for payment.
• Customs clearance: It shows the value of goods for duty and tax.
• Accounting record: It is the source document for recording sales and purchases.
• Insurance: The invoice value is the basis for insuring goods in transit.

2.1.2 Bill of lading

A bill of lading (B/L) is a document issued by a shipping line, or its agent, to the shipper when goods are loaded on a ship. It is the main document of sea transport. A buyer who holds the original bill of lading can collect the goods from the ship at the port of destination, so the document is handled with great care. A set of bills of lading is commonly issued in three originals; once one original has been used to collect the goods, the others are void.

Functions of a bill of lading

• Receipt for goods: It confirms that the carrier has received the stated goods, in the stated quantity and apparent condition.
• Evidence of the contract of carriage: Its terms set out the carrier's duties and the conditions under which the goods are carried.
• Document of title: Whoever lawfully holds the original bill controls the goods; it can be endorsed and passed to another party, such as a bank or a new buyer, to transfer the right to the goods while they are still at sea.

Types of bills of lading

• Clean bill of lading: States that the goods were received in apparent good order, with no remarks about damage or shortage. Banks usually accept only clean bills under a letter of credit.
• Claused (foul) bill of lading: Carries a remark by the carrier, such as "two cartons torn" or "drums leaking", showing the goods or packaging were not in good order.
• Shipped (on board) bill of lading: Issued after the goods have actually been loaded on the named vessel.
• Received for shipment bill of lading: Issued when the carrier has received the goods at the port but has not yet loaded them.
• Straight bill of lading: Made out to a named consignee; it cannot be transferred to another party by endorsement.
• Order bill of lading: Made out "to order", so that it can be endorsed and transferred; this is the negotiable form.
• Through bill of lading: Covers a journey that uses more than one carrier or mode, such as ship and then rail to an inland destination.

2.1.3 Certificate of origin

A certificate of origin is a document that states the country in which goods were produced or manufactured. Customs authorities in the importing country use it to decide whether the goods qualify for a lower or zero rate of duty under a trade agreement, to apply quotas or restrictions, and to collect trade statistics.

Types of certificates of origin

• Preferential certificate of origin: Shows that the goods meet the rules of origin of a trade agreement, such as the East African Community, COMESA or the African Continental Free Trade Area, so that the buyer pays a reduced or zero duty. In Kenya these are issued by the Kenya Revenue Authority.
• Non-preferential (ordinary) certificate of origin: Simply confirms where goods were made, where the importing country or the buyer asks for it but no duty reduction applies. In Kenya these are issued by the Kenya National Chamber of Commerce and Industry.

Points to observe

• The description and quantities must match the commercial invoice exactly, or customs may refuse the preference.
• The goods must truly meet the rules of origin: a false certificate exposes the exporter to penalties and the buyer to back duty.
• The certificate is obtained before or at the time of export, as some agreements do not accept certificates issued later.

2.1.4 Letter of credit

A letter of credit (LC) is a written undertaking by a bank, issued on the instructions of a buyer, to pay the seller a stated amount on condition that the seller presents the documents named in the credit within a stated time. It protects both sides: the seller is sure of payment once the conditions are met, and the buyer is sure that payment is made only against documents showing the goods were shipped as agreed. Most letters of credit are issued under the Uniform Customs and Practice for Documentary Credits (UCP 600) of the International Chamber of Commerce.

Parties to a letter of credit

• Applicant: The buyer, who asks its bank to open the credit.
• Issuing bank: The buyer's bank, which opens the credit and promises payment.
• Beneficiary: The seller, who is paid on presenting the correct documents.
• Advising bank: A bank in the seller's country that confirms the credit is genuine and passes it to the seller.
• Confirming bank: A bank that adds its own promise to pay, so the seller is protected even if the issuing bank fails to pay.

Types of letters of credit

• Irrevocable letter of credit: Cannot be changed or cancelled without the agreement of all parties; under UCP 600 a credit is irrevocable even if it does not say so.
• Confirmed letter of credit: Carries the promise of a second bank in addition to the issuing bank.
• Sight letter of credit: Paid as soon as correct documents are presented.
• Usance (deferred payment) letter of credit: Paid a stated number of days after presentation or shipment, giving the buyer credit.
• Transferable letter of credit: Allows the seller, often a trader, to transfer part or all of the credit to its own supplier.
• Revolving letter of credit: Renews automatically for repeated shipments over a period.
• Standby letter of credit: Paid only if the buyer fails to pay by other means; it works as a guarantee.

How a letter of credit works

1. The buyer and seller agree in the sales contract that payment will be by letter of credit, and on the documents required.
2. The buyer applies to its bank to open the credit, stating the amount, the goods, the latest shipment date and the documents to be presented.
3. The issuing bank opens the credit and sends it to the advising bank in the seller's country.
4. The advising bank checks that the credit is genuine and informs the seller, who checks that every condition can be met.
5. The seller ships the goods and obtains the transport document, such as a bill of lading or airway bill, and the other documents named.
6. The seller presents the documents to the bank within the time allowed.
7. The bank examines the documents; if they comply exactly with the credit, it pays or accepts to pay the seller.
8. The issuing bank releases the documents to the buyer against payment or agreed terms, and the buyer uses them to clear and collect the goods.

Points to observe

Banks deal in documents, not goods: a small difference between the documents and the credit, such as a different spelling of the consignee or a late shipment date, can cause the bank to refuse payment. The distribution team must therefore read the credit carefully and prepare every document to match it exactly.

2.1.5 Cargo manifest

A cargo manifest is a list of all the cargo carried on a ship, aircraft, train or vehicle for one voyage, flight or trip. It is prepared by the carrier or its agent from the bills of lading or airway bills issued, and is submitted to the customs authority at the port of loading and before arrival at the port of discharge. Customs uses it to know what is arriving, to select cargo for inspection and to make sure every consignment that lands is either cleared or accounted for.

Uses of the cargo manifest

• Customs control: Shows customs what goods are on board so that none are landed without clearance.
• Port and terminal planning: Helps ports plan berths, cranes, storage and onward transport.
• Loading and discharge: Guides crews on where each consignment is stowed and where it is to be offloaded.
• Reconciliation: Allows goods discharged to be checked against goods declared, so shortages and excess cargo are identified.
• Safety: Identifies dangerous goods and their position on board.

2.1.6 Airway bill

An airway bill (also written air waybill, AWB) is the transport document issued by an airline, or by a freight forwarder acting as its agent, for goods sent by air. It does the same job as a bill of lading for air freight, except that it is not a document of title: the goods are delivered to the consignee named on it, and it cannot be endorsed to transfer ownership. Each airway bill has a unique number whose first three digits identify the airline, which is used to track the consignment. A set normally has three originals: one for the carrier, one for the consignee and one for the shipper.

Functions of an airway bill

• Receipt for goods: Confirms that the airline has accepted the goods for carriage.
• Evidence of the contract of carriage: Sets out the conditions under which the goods are carried.
• Freight bill: States the freight and other charges and whether they are prepaid or payable at destination.
• Customs declaration support: Used by customs at origin and destination to identify the consignment.
• Handling instructions: Tells the airline how to handle the goods, such as "keep cool" for flowers and fresh produce or "perishable" labels.
• Insurance certificate: Where the shipper buys insurance through the airline, it records the insured value.

Master and house airway bills

When a freight forwarder groups several shippers' consignments into one shipment, the airline issues a master airway bill (MAWB) to the forwarder for the whole shipment, and the forwarder issues a house airway bill (HAWB) to each shipper for that shipper's own goods.

2.1.7 Freight note

A freight note is a document prepared by the carrier, usually the shipping company or its agent, and sent to the shipper stating the freight charges payable for carrying the goods. It works as the carrier's invoice for transport: it shows how the charges were worked out from the weight or volume of the goods and the agreed rate, and adds any other charges. The shipper pays the amount stated before the carrier releases the bill of lading, unless freight is to be paid at destination.

Uses of the freight note

• Billing for transport: Tells the shipper exactly what the carriage costs.
• Checking: The shipper checks it against the agreed freight quotation and the weights on the bill of lading.
• Costing: The freight cost is added to the cost of the goods to work out the landed cost and the selling price.
• Record: It supports payment and the accounting entry for carriage outwards.