The Reasons for the Procedure
The illustrated process flow for a Commodity deal is presented in an optimal version and should be completed within 2 weeks. This is necessary because suppliers must keep price commitments and have to provide appropriate goods.
The purpose of this process is to ensure that all parties which are involved in the process have clear and comprehensible terms and conditions for a Commodity transaction before there are made written and legally binding commitments.
The procedures favor neither the buyer nor the seller, but serve only for the successful completion of the transaction.
It is customary that intermediaries and agents are involved in these Commodity transactions and that the customer and supplier only learn about each other when the contract is signed.
1. LOI (Letter of Intent)
A fully completed LOI (Letter of Intent) from the buyer contains all product information with product specifications and corresponding terms (terms of payment, terms of delivery, etc.), with which the buyer is ready to buy the goods.
This LOI will be checked by the seller and he can decide if he can fulfill the buyer’s conditions or with what deviations. The buyer will be informed accordingly.
The buyer and supplier have now the opportunity, often through intermediaries or agents, to negotiate the requirements and conditions in order to achieve consensus in their mutual interest. If no consensus can be achieved, the LOI expires and the process is already considered as failed at this early stage.
In some cases, the supplier may require in addition the bank information of the buyer in this early stage of the process, because usually only LCs (Letter of Credit) from WORLD TOP 50 banks are accepted by sellers.
2. SCO (Soft Corporate Offer) or FCO (Full Corporate Offer)
Now that an agreement has been reached between the buyer and the seller regarding all specifications and conditions according to the LOI (Letter of Intent), and all involved parties has understood it, the seller issue a SCO (Soft Corporate Offer) or FCO (Full Corporate Offer) to the buyer. Therein are usually also described further processes regarding the conclusion of the purchase contract, delivery of goods and payment.
The buyer has now usually a time frame of 3 to 5 days to sign and seal the SCO (Soft Corporate Offer) or FCO (Full Corporate Offer) to send it back and to initiate all preparations for the next step (point 3.).
3. ICPO (Irrevocable Corporate Purchase Order)
Within a period of 3 to 5 days, the buyer must issue an ICPO (Irrevocable Corporate Purchase Order), in which all agreed specifications, terms and processes are described. With this, the buyer expresses his firm purchase intent.
Together with the ICPO (Irrevocable Corporate Purchase Order), the buyer must submit a POF (Proof of Funds) in the form of a BCL (Bank Comfort Letter) or RWA (Ready, Willing & Able), a DLC / LC Draft, copy of Company Register and a copy of Buyer’s Passport to the seller.
4. SPA (Sales & Purchase Agreement)
Upon receipt of the ICPO (Irrevocable Corporate Purchase Order) and POF (Proof of Funds) of the buyer, the documents will be reviewed by the seller and the buyer will get short-term an appropriate SPA (Sales & Purchase Agreement) in form of a draft. The prerequisite for this is a positive POF (Proof of Funds) corresponding to the scope of the contract.
The buyer generally has a timeframe of 48 hours to review the draft contract. Ambiguities must be resolved as soon as possible at this point to the mutual agreement.
If there are a mutual clarify of all details of the contract, the buyer will receive a signed and sealed final contract from the seller, which must also be signed and sealed by the buyer. At this time, the buyer will also receive a pro-forma invoice for the first of the contractually agreed deliveries. The buyer can request a POP (Proof of Product) from the seller at this point. So he can sign the contract safely and legally.
Each of the involved parties in this process, directly or indirectly, receives a signed copy of the contract.
It should be noted, that this can be the first time the seller and buyer know each other at this stage of the process since intermediaries can be used up to this point.
5. Opening of the LC (Letter of Credit)
With the contract signed and sealed by both parties and the documents submitted by the supplier (Proforma Invoice and POP), the importer is to able to open the LC (Letter of Credit) from his bank. Until when the LC (Letter of Credit) has to be opened is regulated in the SPA (Sales & Purchase Agreement). The rule is 5 days after signing the contract.
Even before signing a contract at an earlier stage in the process (usually with the submission of an ICPO), some suppliers require a letter of credit draft from the buyer to avoid delays and problems that may arise after signing the contract (payment, delivery, etc.).