Demurrage occurs when an importer doesn’t clear its shipments through U.S. Customs in a timely manner. Customs imposes significant fines, so most companies do their best to have all the paperwork on hand and ready to go BEFORE the shipment ever arrives at port. But every now and then, something goes wrong and the shipments get stuck in limbo at the port.
What are the three most common causes of demurrage?
1: Lack of financing – with 10-10-80 payment terms, the vast majority of the purchase price is paid at the very end of the transaction. Many aggressive importers attempt to stretch their financing as far as possible, so they may find themselves over-extended and unable to make the payment for the final 80% due when the goods are loaded onto the ship. In this case, the seller will refuse to release the goods into the importers possession, causing them to be stranded at port, where U.S. Customs will be quick to impose demurrage charges. Those charges can add up very fast, so it usually makes sense for importers to try raising the money to get them out, even if it means accepting usurious interest rates on short-term bridge financing.
2: Poor understanding of the paperwork required by customs – The process of clearing customs can be confusing, and without an experienced broker to hold your hand (it is perfectly to clear your own shipments through customs without a broker, after all), you may end up overwhelmed and unprepared to submit all the correct documents at the last minute.
In order of importance, the four documents required to clear most shipments through U.S. Customs are:
Commercial Invoice – Your supplier’s invoice for the shipment is an itemized list with the price paid and the Harmonized Schedule code for each product on the shipment.
Bill of Lading or Airway Bill – A receipt for the transportation of the goods from their overseas point of origin to the destination port in the US. In the international trade industry, the original BL also servers as legal title to the goods, so by submitting the original BL to U.S. Customs, you are in effect demonstrating that you are the legal owner of the products in question. The BL provides data on the number of products on the shipment, weight, volume, product description, contact information for both parties, name of the carrier, plus details on the ports the goods will pass through en route the U.S.
Packing List – A document from your supplier or their shipping company that lists all the packages within the shipment and their contents. This is different from the commercial invoice in that it deals with the actual boxes on the shipment, showing what is in each box, instead of just grouping everything together by product type.
Arrival Notice – When the ship carrying your goods reaches the port, your carrier or freight forwarder will send you the Arrival Notice. It’s just a document certifying the date on which your goods will arrive. CBP requires this so they can be certain that your shipment is in fact at the port before they waste time on it.
With these four documents in hand, any customs broker will be able to help you clear the vast majority of shipments, although some specific goods will require additional documents. For example, shipments containing unfinished wood products are required to show a fumigation certificate certifying that they have been treated with pesticides.
3: Incompetent Customs Brokers – This is the least common cause of demurrage, but surely there are incidents where customs brokers themselves lose paperwork or fail to file it on time. In fact, most customs clearances can be processed in under 15 minutes, and the reply as to whether the goods have cleared is instant. So if your broker tells you they are waiting to hear back from customs about whether your goods have cleared, chances are they haven’t even filed them yet. Get on their case before you rack up demurrage charges. And then think about getting a new customs broker or working with a software application that can help you do it yourself.