Glossary of Trade Finance Terms
Import, Export And Trade Finance Industry Terms
Accounts Receivable are monies which are owed to a company by its customers for products and services the company has provided. Once invoices have been sent to customers accounts receivable become current assets on the company’s balance sheet.
Accounts Receivable Factoring
Accounts Receivable Factoring is a method of Trade Financing whereby a company sells their accounts receivable in exchange for working capital. The purchaser of the receivables relies on the creditworthiness of the customers who owe the invoices, not the subject company.
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Asset Based Lending
Asset Based Lending is a method of Trade Financing that allows a business to leverage company assets as collateral for a loan. Asset-based loans are an alternative to traditional debt which is generally characterized as higher risk which requires higher interest rates.
Advance Against Documents
Advances Against Documents are loans made solely based on the security of the documents covering the shipment.
An Advising Bank, which operates in the exporter’s country, handles Letters of Credit for foreign banks by notifying the export firm that the credit has been opened in its favor. The Advising Bank fully informs the exporter of the conditions of the Letter of Credit without necessarily bearing responsibility for payment.
Advisory Capacity is a term indicating that a shipper’s agent or representative is not empowered to make definitive decisions or adjustments without approval of the group or individual represented. See also Without Reserve.
Alongside refers to the side of a ship. Goods to be delivered Alongside are to be placed on the dock or barge within reach of the transport ship’s tackle so that they can be loaded aboard the ship.
Arbitrage is the process of buying foreign exchange, stocks, bonds, and other commodities in one market and immediately selling them in another market at higher prices. It’s good work if you can get it.
Balance of Trade
Balance of Trade is the difference between a country’s total imports and exports. If exports exceed imports, a favorable Balance of Trade exists; if not, a trade deficit is said to exist.
Barter is a trade in which merchandise is exchanged directly for other merchandise without use of money. Barter is an important means of trade with countries using currency that is not readily convertible.
A Beneficiary is the person in whose favor a Letter of Credit is issued or a draft is drawn.
Bill of Lading
Bill of Lading is a document that establishes the terms of a contract between a shipper and a transportation company under which freight is to be moved between specified points for a specified price. Usually prepared by the shipper on forms issued by the carrier, it serves as a document of title, a contract of carriage, and a receipt for goods. Also see Air waybill, Inland bill of lading, Ocean bill of lading, and Through bill of lading.
A Bonded Warehouse is a warehouse authorized by customs officials for the storage of goods on which payment of duties is deferred until the goods are removed.
Carnet is a customs document permitting the holder to carry or send merchandise temporarily into certain foreign countries (for display, demonstration, or similar purposes) without paying duties or posting bonds.
Cash Against Documents (CAD)
Cash Against Documents is the payment for goods in which a commission house or other intermediary transfers title documents to the buyer upon payment in cash.
Cash in Advance (CIA)
Payment for goods in which the price is paid in full before shipment is made. This method is usually used only for small purchases or when the goods are built to order.
Cash with Order (CWO)
Cash with Order is the payment for goods whereby the buyer pays when ordering and in which the transaction is binding on both parties.
Certificate of Inspection
Certificate of Inspection is a document certifying that merchandise (such as perishable goods) was in good condition immediately prior to its shipment.
Certificate of Manufacture
Certificate of Manufacture is a statement (often notarized) in which a producer of goods certifies that manufacture has been completed and that the goods are now at the disposal of the buyer.
Certificate of Origin
Certificate of Origin is a document, required by certain foreign countries for tariff purposes, certifying the country of origin of specified goods.
Clean Bill of Lading
Clean Bill of Lading is a receipt for goods issued by a carrier that indicates that the goods were received in “apparent good order and condition,” without damage or other irregularity. See also Foul Bill of Lading.
Collection Papers are the documents (commercial invoices, bills of lading, etc.) which are submitted to a buyer for the purpose of receiving payment for a shipment.
Commercial Finance is defined as the offering of loans to businesses by a bank or other lender. Commercial loans are either secured by business assets, accounts receivable, etc., or unsecured, in which case the lender relies on the borrower’s cash flow to repay the loan.
Commercial invoice is an itemized list of goods shipped, usually included among an exporter’s collection papers.
Commission Agent is commonly known as Purchasing Agent.
Common Carrier is an individual, partnership, or corporation that transports persons or goods in exchange for compensation.
Confirmed Letter of Credit
A Confirmed Letter of Credit is a Letter of Credit issued by a foreign bank, which has been confirmed as valid by a domestic bank. An exporter whose form of payment is a Confirmed Letter of Credit is assured of payment by the domestic bank who confirmed the Letter of Credit even if the foreign buyer or the foreign bank defaults. See Letter of Credit.
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Consignment is a delivery of merchandise from an exporter (the consignor) to an agent (the consignee) subject to an agreement by the agent that the agent will sell the merchandise for the benefit of the exporter, subject to certain limitations, like minimum price. The exporter (consignor) retains ownership of and title to the goods until the agent (consignee) has sold them. Upon sale of the goods, the agent typically retains a commission and remits the remaining net proceeds to the exporter.
A Consular Declaration is a formal statement, made to the consul of a foreign country, describing goods to be shipped.
Consular Invoice is a document, which is required by some foreign countries, that describes a shipment of goods and declares certain information such as the identities of the consignor and consignee, along with the value of the shipment. Consular Invoices are certified by a consular official of the foreign country, and are used by the country’s customs officials to verify the value, quantity, and nature of the shipment.
Convertible Currency is currency that can be bought and sold for other currencies at will.
Correspondent Bank is a bank that, in its own country, facilitates the business of a foreign bank.
Cost and Freight (CFR)
Cost and Freight is a pricing term that indicates that the cost of freight for shipping goods is included in the quoted price, but does not include the cost of insurance. The buyer is responsible for arranging and paying for insurance.
Cost, Insurance, Freight (CIF)
Cost, Insurance, Freight is a pricing term that indicates that the cost of the goods, insurance, and freight are all included in the quoted price.
Countertrade is the sale of goods or services that are paid for in whole or in part by the transfer of goods or services from a foreign country.
Countervailing Duty is a duty which is imposed to counter unfairly subsidized products.
A Credit Report is a detailed document supplied by a third party reporting agency that summarizes a firm’s credit history and current financial position. It will inform of any lien in force or pending verdict(s) against the company.
Credit Risk Insurance
Credit Risk Insurance is insurance designed and written to protect against loss in the event of nonpayment for delivered goods. See also Marine Insurance.
A Cross-Border Sale refers to any sale that is made between a firm in one country and a firm located in a different country.
Customhouse Broker is an individual or firm licensed to enter and clear goods through customs.
Date Draft is a draft that matures a specified number of days after the date the draft is issued, without regard to the date of acceptance. See also Draft, Sight Draft and Time Draft.
Deferred Payment Credit
Deferred Payment Credit is a type of Letter of Credit which provides for payment some date and time after presentation of shipping documents by exporter.
See also Sight Draft.
Devaluation is the act of officially lowering the value of that country’s currency as it relates to one or more foreign currencies. For example, if the US dollar was devalued relative to the French franc, after devaluation the dollar would buy fewer francs than before.
Dispatch is an amount paid by a vessel’s operator to a charterer, if the loading or unloading is performed in less time than that which was stipulated in the charter party.
Distributor is a foreign agent who sells for a supplier directly and maintains an inventory of the supplier’s products.
Dock receipt is a receipt issued by an ocean carrier to acknowledge receipt of a shipment at the carrier’s dock or warehouse facilities. See also Warehouse receipt.
Documentary Draft is a draft to which documents are attached.
Documents Against Acceptance
Documents Against Acceptance are instructions given by a shipper to a bank indicating that documents transferring title to goods should be delivered to the buyer (or drawee) only upon the buyer’s acceptance of the attached draft.
Draft (or Bill of Exchange)
Draft (or Bill of Exchange) is an unconditional written order from one party (the drawer) to another party (the drawee), which directs the drawee to pay a specified amount to a named drawer at a fixed or determinable future date. See also Date Draft, Sight Draft and Time Draft.
Dumping is the selling of merchandise in one foreign country at a price which is below the price at which the same merchandise is sold in the home market or selling such merchandise below the costs incurred in production and shipment.
Duty is a tax imposed on imports by the customs authority of a country. Duties are generally based on the value of the goods (ad valorem duties), some other factor such as weight or quantity (specific duties), or a combination of value and other factors. See also Compound Duties.
Export-Import Bank of the United States (ExIm Bank)
Export-Import Bank of the United States is the official export credit agency of the United States with the mission of financially assisting export of US goods and services to international markets. From their own self-praising literature, the US ExIm Bank enables US companies to turn export opportunities into real sales that help to maintain and create US jobs and contribute to a stronger national economy. Ex-Im Bank
Export Trading Company (ETC)
Export Trading Company is a company that facilitates the export of goods and services. An ETC can either act as the export department for producers or take title to the product and export for its own account.
Eurodollars are US dollars placed on deposit in banks outside the United States; usually in Europe.
Exchange Permit is a government issued permit which is sometimes required by the importer’s government to enable the import firm to convert its own country’s currency into foreign currency with which to pay a seller in another country.
Exchange Rate is the price of one currency in terms of its relation to another, that is, the number of units of one currency that may be exchanged for one unit of another currency.
Export Broker is an individual or firm that brings together buyers and sellers for an export transaction in exchange for a fee but does not take part in actual sales transactions.
Export Commission House
Export Commission House is an organization that acts as a purchasing agent for a foreign buyer in exchange for a commission.
See Shipper’s Export Declaration.
Export License is a government issued document that permits the licensee to export designated goods to certain destinations. See General Export License and Individually Validated Export License.
Export Management Company
Export Management Company is a private firm that serves as the export department for multiple producers of goods and services, either by taking title or by soliciting and transacting export business on behalf of its clients in return for a commission, salary, retainer or fee.
Export Trading Company
Export Trading Company is a firm similar or identical to an Export Management Company.
Facility is a form of debt financing in which a loan is extended by a bank or debt financier to a business for operating capital.
Factoring is the selling of a company’s accounts receivable at a discount. The lender assumes the credit risk of the debtor and receives the cash when the debtor settles the account.
Free Alongside Ship (FAS)
Free Alongside Ship is pricing term indicating that the quoted price includes the cost of delivering the goods alongside a designated vessel.
Free Carrier (FCA)
Free Carrier replaces the former term “FOB named inland port” to designate the seller’s responsibility for the cost of loading goods at the named shipping point. Free Carrier may be used for multimodal transport, container stations, and any mode of transport, including air.
FCIA stand for the Foreign Credit Insurance Association.
Free In (FI)
Free In is a pricing term indicating that the charterer of a vessel is responsible for the cost of loading and unloading goods from the vessel.
Floating Policy – See Open policy.
Free Out (FO)
Free Out is a pricing term indicating that the charterer of a vessel is responsible for the cost of loading goods from the vessel.
Free on Board (FOB)
Free on Board at named port of export is a pricing term indicating that the quoted price covers all expenses up to and including delivery of goods upon an overseas vessel provided by or for the buyer.
Force Majeure is the title of a standard legal clause in marine contracts exempting the parties for nonperformance of their obligations under the contract if the nonperformance occurred as a result of conditions which were beyond their control, such as natural disasters like earthquakes, floods, or war.
Foreign Bank Draft
Foreign Bank Draft is a check from one foreign bank to another, where payment is guaranteed to be available by the issuing bank.
Foreign Currency Option Contract
Foreign Currency Option Contract is a contract that allows the holder to buy or sell currency at a specified exchange rate during a specified period of time. For this right, a premium is paid to the broker.
Foreign Exchange is the currency or credit instruments of a foreign country. Also refers to transactions involving the purchase or sale of currencies.
Foreign Sales Agent
Foreign Sales Agent is an individual or firm that serves as the foreign representative of a domestic supplier and seeks sales abroad for the supplier.
Foreign Trade Zone
Foreign Trade Zone is a port designated by the government of a country for duty-free entry into the country of any non-prohibited goods. Merchandise may be stored, displayed or used for manufacturing within the zone and re-exported without duty or tax being paid. Duties are imposed on the merchandise (or items manufactured from the merchandise) only when the goods pass from the Foreign Trade Zone into an area of the country which is subject to the customs authority. See also Free Trade Zone.
Forward Transaction is an agreement to buy one currency and sell another at a future date at a specific exchange rate. The predetermined foreign exchange rate eliminates exchange rate risk.
Foul Bill of Lading
Free Port is an area such as a port city into which merchandise may legally be moved without payment of duties.
Free Trade Zone
Free Trade Zone is a port designated by the government of a country for duty-free entry into the country of any non-prohibited goods. Merchandise may be stored, displayed or used for manufacturing within the zone and re-exported without duty or tax being paid. Duties are imposed on the merchandise (or items manufactured from the merchandise) only when the goods pass from the Free Trade Zone into an area of the country which is subject to the customs authority. See also Foreign Trade Zone.
Freight Forwarder is an independent business that handles export shipments for compensation. (A freight forwarder is among the best sources of information and assistance on export regulations and documentation, shipping methods and foreign import regulations.)
General Agreement on Tariffs and Trade (GATT)
General Agreement on Tariffs and Trade (GATT) is a multilateral treaty intended to help reduce trade barriers between signatory countries and to promote trade through tariff concessions.
General Export License
General Export License are any of various export licenses covering export commodities for which individually validated export licenses are not required. No formal application or written authorization is needed to ship exports under a general export license.
Import License is a document required and issued by some national governments authorizing the importation of goods into their individual countries.
Individually Validated Export License
Individually Validated Export License is a document issued by the US Government which authorizes the export of specific commodities. This license is for a specific transaction or a limited time period in which the exporting is to take place. See also General Export License.
Inland Bill of Lading
Inland Bill of Lading is a bill of lading which is used in transporting goods overland to the exporter’s international carrier. Although a Through Bill of Lading can sometimes be used, it is usually necessary to prepare both an Inland Bill of Lading and an Ocean Bill of Lading for export shipments. See also Air waybill, Ocean Bill of Lading, and Through Bill of Lading.
Insolvency occurs when a company is unable to meet debt obligations.
Interest Rate is a fee for borrowing money from a bank or institution. The fee is usually an annual percentage of the amount borrowed.
International Lending is known as offshore lending or cross-border financing. International lending occurs when a lender and borrower are in different countries.
Invoice Discounting is a type of loan that is drawn against a company’s outstanding invoices but does not require that the company give up administrative control of those invoices.
Irrevocable Letter of Credit
Letter of Credit (LC)
Letter of Credit or LC is a document issued by a bank for the benefit of a buyer of goods, which authorizes the seller to draw a specified sum of money under specified terms, usually the receipt by the issuing bank of certain documents within a given time.
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Licensing is a business arrangement in which the manufacturer of a product (or a firm with proprietary rights over certain technology, trademarks or the like) grants permission to some other group or individual to manufacture the product (or make use of that proprietary material) in return for specified royalties or other payment.
Marine Insurance is a type of insurance that compensates the owners of goods transported overseas in the event of loss that cannot be legally recovered from the carrier. Also covers air shipments. See also Credit Risk Insurance.
Marking or marks are letters, numbers or other symbols placed on cargo packages to facilitate identification.
Ocean Bill of Lading
Ocean Bill of Lading is a bill of lading indicating that the exporter consigns a shipment to an international carrier for transportation to a specified foreign market. Unlike an inland bill of lading, the ocean bill of lading also serves as a collection document. See also Air Waybill, Inland Bill of Lading, and Through Bill of Lading.
On Board Bill of Lading
On Board Bill of Lading is a bill of lading in which a carrier certifies that goods have been placed on board a certain vessel.
Open Account is a trade arrangement in which goods are shipped to a foreign buyer without guarantee of payment. The obvious risk this method poses to the supplier makes it essential that the buyer’s integrity be unquestionable.
Open Insurance Policy
Open Insurance Policy is a marine insurance policy that applies to all shipments made by an exporter during a certain period of time rather than a policy which only insures one specific shipment.
Order Bill of Lading
Packing List is a list showing the number and kinds of items being shipped, as well as other information needed for transportation.
Parcel Post Receipt
Parcel Post Receipt is a signed acknowledgment by postal authorities which acknowledges delivery of a shipment to the receiver via parcel post.
Participation is a loan structure whereby two or more lenders participate with each other in providing joint financing to a borrower because the loan would otherwise exceed the legal lending limit of one or both of the lenders.
Perils of the Sea
Perils of the Sea is a marine insurance term used to designate heavy weather, stranding, lightning, collision, and sea water damage.
Political Risk, when used in the context of export financing refers to the risk of loss due to such causes as currency inconvertibility, government action which prevents the entry of goods, expropriation, confiscation and war.
Private Export Funding Corporation (PEFCO)
Private Export Funding Corporation (PEFCO) is a corporation that lends to foreign buyers to finance exports from the United States.
Pro forma Invoice
Pro forma Invoice is an invoice provided by a supplier prior to the shipment of merchandise, which informs the buyer of the kinds, nature and quantities of goods to be shipped along with their value, and other important specifications such as weight and size.
Quota is the quantity of goods of a specific kind that a government permits to be imported into the country without restriction or imposition of additional duties.
Receivable Management involves processing activities related to managing a company’s accounts receivable including collections, credit policies and minimizing any risk that threatens a firm from collecting receivables.
Remitting Bank is the bank that sends a draft to the overseas bank for collection.
Revocable Letter of Credit
Revocable Letter of Credit is a Letter of Credit that can be canceled or altered by a buyer after it has been issued by the buyer’s bank. See also Irrevocable Letter of Credit.
Risk Management is the process of evaluating and managing current and future financial risk to decrease a company’s exposure. The practice of financial risk management can never prevent a company from all possible risks because some are not predicted in time.
Secured Funding is a loan which is backed by the borrower’s assets in order to reduce the risk taken on by the lender. If the borrower cannot make the required payments, the assets may be forfeited to the lender.
Shipper’s Export Declaration
Shipper’s Export Declaration is a form prepared by a shipper which is required for all shipments by the US Treasury Department that indicates the value, weight, destination, and other basic information about an export shipment.
Ship’s Manifest is an instrument in writing, signed by the captain of a ship, that lists the individual shipments constituting the ship’s cargo.
Sight Draft (SD)
Sight Draft or SD is a draft that is payable upon presentation to the drawee. See also Date Draft and Time Draft.
Special Purpose Entity
A Special Purpose Entity is a business interest formed to accomplish specific and temporary objectives. It is legally binding (a limited company or a limited partnership) and used by companies to isolate the firm from financial risk. A company can transfer assets to the SPE for management or to finance a project without putting the entire firm at risk.
Sponsor Finance is a type of financing in which an institutional investor or a brokerage firm has a position in a security and influences other investors to establish a position in that security.
Spot Exchange is the purchase or sale of foreign exchange for immediate delivery.
A Spot Transaction is a foreign exchange transaction in which an agreed upon price is set and funds are transferred within two business days.
Structured Trade Finance
Structured Trade Finance is cross-border trade finance in emerging markets where the intention is that the loan gets repaid by the liquidation of a flow of commodities.
A Swap Contract is a contract in which two parties promise to make payments to one another on scheduled dates in the future. Swaps are not guaranteed by any clearinghouse and are susceptible to default. Corporations and financial institutions are the primary users of swaps.
Standard Industrial Classification (SIC)
Standard Industrial Classification, which is also known as SIC, is a standard numerical code system used to classify products and services.
Standard International Trade Classification (SITC)
Standard International Trade Classification, which is also known as SITC, is a standard numerical code system that was developed by the United Nations to classify commodities used in international trade.
Straight Bill of Lading
Tare Weight is the weight of a shipping container and packing materials without the weight of the goods it contains. See also Gross Weight.
Through Bill of Lading
Through Bill of Lading is a single bill of lading converting both the domestic and international carriage of an export shipment. An Air Waybill, for instance, is essentially a Through Bill of Lading used for air shipments. Ocean shipments, on the other hand, usually require two separate documents, an inland bill of lading for domestic carriage and an ocean bill of lading for international carriage. Through Bills of Lading are insufficient for ocean shipments. See also Air Waybill, Inland Bill of Lading, and Ocean Bill of Lading.
Time Draft is a draft that matures either a certain number of days after acceptance or a certain number of days after the date of the draft. See also Date Draft and Sight Draft.
Trade Credit Insurance
Trade Credit Insurance is a risk management product offered to business entities wishing to protect their balance sheet assets from loss due to credit risks such as protracted default, insolvency and bankruptcy. Trade Credit Insurance often includes a component of political risk insurance, which insures the risk of non-payment by foreign buyers due to currency issues, political unrest, expropriation, etc.
Transaction Statement is a document that delineates the terms and conditions of a transaction that have been agreed upon between the importer and exporter.
Trust Receipt is a release of merchandise by a bank to a buyer in which the bank retains title to the merchandise. The buyer, who obtains the goods for manufacturing or sales purposes, is obligated to maintain the goods (or the proceeds from their sale) distinct from the remainder of his or her assets and to hold them ready for repossession by the bank.
Warehouse Receipt is a receipt issued by a warehouse listing goods received for storage.
Wharfage is a charge assessed by a pier or dock owner for handling incoming or outgoing cargo.
Without Reserve is a term indicating that a shipper’s agent or representative is empowered to make definitive decisions and adjustments abroad without approval of the group or individual represented. See also Advisory Capacity.
Working Capital or current capital is cash available for day-to-day operations of a firm. It is computed by deducting current liabilities from current assets. The amount of available working capital is a measure of a firm’s ability to meet its short-term obligations. In the normal trade cycle of a firm, working capital equals working assets. [rule type=”top”]