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CONSIGNMENT
In a consignment transaction, the goods are shipped to importer, but not sold. The title remains with the exporter until they are sold and payment made when the goods are sold. Although it can be a preferred settlement method of payment for the importer or buyer, it places the risk on the exporter or seller, including political or economic country risk or insufficient buyer funds.
BILL OF EXCHANGE
An unconditional order in writing addressed by one person to another, signed by the person giving it , and requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a certain sum of money to or to the order of a specified person or bearer. Also referred to as a draft.
COLLECTING BANK
Any bank, other than the Remitting Bank, involved in obtaining payment or acceptance from the Importer (drawee).
COMMERCIAL DOCUMENTS
Documents exchanged between the buyer and the seller such as commercial invoices or transport documents that give details about the goods and/or services contracted.
DOCUMENTARY COLLECTION
Method of payment used in international trade whereby the contracting parties (Exporter & Importer) utilize banking channels to exchange documents for payment or acceptance.
DRAFT
An unconditional order in writing addressed by one person to another, signed by the person giving it , requiring the person to whom it is addressed to pay, on demand or at a fixed or determinable future time a certain sum of money to or to the order of a specified person or bearer. Also referred to as a Bill of Exchange.
DRAWEE
The party, also known as the buyer or Importer, who is presented with documents (financial or commercial) for the purpose of either payment or acceptance, in accordance with the Collection instructions.
DRAWER
The party, also known as the seller or Exporter, who authorizes a bank (the Remitting Bank) to handle documents on its behalf.
EXPORTER
The party, also known as the seller or drawer, who has contracted to sell the goods.
FINANCIAL DOCUMENTS
Documents such as bills of exchange, promissory notes or other similar documents used to obtain payment.
Documents such as bills of exchange, promissory notes or other similar documents used to obtain payment.
IMPORTER
The party, known as the buyer or drawee, who has contracted to buy. Also known as buyer or drawee.
PRESENTING BANK
The Collecting Bank making presentation to the Importer (drawee), usually the Importer's bank.
REMITTING BANK
The bank that the Exporter authorizes to carry out the Collection on its behalf.
UNIFORM RULES FOR COLLECTIONS (ICC PUBLICATION 522)
A set of rules and definitions on the practice of Collections published by the International Chamber of Commerce that require banks to act in accordance with established procedures
Letter Of Credit
ACCEPTING BANK
The bank named in a term Letter of Credit on which drafts are drawn that has agreed to accept the draft. By accepting the draft, the Drawee Bank signifies its commitment to pay the face amount at maturity to anyone who presents it at maturity. After accepting the draft, the Drawee Bank becomes the Accepting Bank.
ADVISING BANK
The bank to which the Issuing Bank sends the Letter of Credit, with instructions to notify the Exporter (Beneficiary).APPLICANT
The party that has contracted to buy goods; the Importer in the Letter of Credit process."AVAILABLE WITH" BANK
The bank authorized in the Letter of Credit to effect payment under, accept or negotiate the Letter of Credit.BENEFICIARY
The party that has contracted to sell the goods; the Exporter in the Letter of Credit process.BILL OF EXCHANGE
An unconditional order in writing addressed by one person to another, signed by the person giving it , and requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a certain sum of money to or to the order of a specified person or bearer. Also referred to as draft.COMMERCIAL DOCUMENTS
Documents exchanged between the buyer and the seller such as commercial invoices or transport documents that give detail about the goods and/or services contracted.CONFIRMED LETTER OF CREDIT
Letter of Credit where a Confirming Bank, usually located in the Exporter's country, has guaranteed payment under the Letter of Credit assuming that all terms and conditions of the Letter of Credit have been met. With a Confirmed Letter of Credit, payment risk is assumed by the Confirmed Bank as well as the Issuing Bank, thereby providing more protection for the Exporter.CONFIRMING BANK
The bank which ,at the request of the Issuing Bank, adds its confirmation to the Letter of Credit. In doing so, the Confirming Bank undertakes to make payment to the Exporter upon presentation of documents under the Letter of Credit assuming all terms and conditions of the Letter of Credit have been met.DISCREPANCIES
Any inconsistency found in documents presented or failure to comply with the terms and conditions of the Letter of Credit.DOCUMENTARY CREDIT
Synonymous with Letter of Credit. See Letter of Credit.DRAFT
An unconditional order in writing addressed by one person to another, signed by the person giving it , requiring the person to whom it is addressed to pay, on demand or at a fixed or determinable future time a certain sum of money to or to the order of a specified person or bearer. Also referred to as a Bill of Exchange.DRAWEE BANK
The bank named in the Letter of Credit on which the drafts are to be drawn.EXPORTER
The party that has contracted to sell goods. Also known as seller or beneficiary.FINANCIAL DOCUMENTS
Documents used in international transactions that are directly related to payment. E.g. drafts.IMPORTER
The party that has contracted to buy goods. Also known as buyer or applicant.INCOTERMS
Standardized contract terms issued by the International Chamber of Commerce that describe the obligations of the Exporter and Importer with respect to freight costs, insurance, taxes, duties, etc. Also called trade terms. Click here for definitions of the most commonly used incoterms. FAS
Free Alongside Ship. Exporter delivers the goods alongside the vessel on the quay or in the lighters at the named port of shipment.FOB
Free On Board. Exporter delivers the goods on board the vessel or at the airport at the named port/airport of shipment.CFR
Cost and Freight. Exporter pays costs and freight to deliver the goods to the named port of destination. This term can be used only for sea and inland waterway transport.CIF
Cost, Insurance and Freight. Exporter pays costs, insurance and freight to deliver the goods to the named port of destination.IRREVOCABLE LETTER OF CREDIT
A Letter of Credit that cannot be canceled or changed without the consent of all parties, including the Exporter. Unless otherwise stipulated, all Letters of Credit are irrevocable.ISSUING BANK
The bank issuing the Letter of Credit at the request of its customer the Importer (Applicant) in favour of the Exporter (Beneficiary), guaranteeing payment under the Letter of Credit if all terms and conditions are met.LETTER OF CREDIT
A written instrument issued by a bank at the request of its customer, the Importer (Applicant), whereby the bank promises to pay the Exporter (Beneficiary) for goods or services provided that the Exporter presents all documents called for, exactly as stipulated in the Letter of Credit, and meets all other terms and conditions set out in the Letter of Credit. Also referred to as a Documentary Credit.REIMBURSING BANK
The bank designated in the Letter of Credit to reimburse the "available with" Bank which submits payment claims under the Letter of Credit.REVOCABLE LETTER OF CREDIT
A revocable Letter of Credit can be revoked without the consent of the Exporter, meaning that it may be canceled or changed up to the time the documents are presented.STANDBY LETTER OF CREDIT
A written instrument issued by a bank (Issuing Bank) at the request of its customer (Applicant) on behalf of a beneficiary, whereby the Issuing Bank agrees to provide financial remedy in the event that the Applicant defaults on any terms and conditions specified under the Standby Letter of Credit. Standby Letters of Credit are often issued at the request of Importers in favour of Exporters as financial security for goods purchased on Open Account.TRANSFERABLE LETTER OF CREDIT
A Letter of Credit that allows the Beneficiary (Exporter) to instruct its bank to transfer the credit in part or in whole to a Secondary Beneficiary.TRANSFERRING BANK
The bank authorized by the Issuing Bank to transfer at the Beneficiary's request all or part of the Letter of Credit to another party.UNIFORM CUSTOMS AND PRACTICES FOR DOCUMENTARY CREDITS (UCP)
A set of guidelines, rules and definitions governing Letters of Credit published by the International Chamber of Commerce. For those banks that subscribe, UCP facilitates the standardization of Letters of Credit.
OPEN ACCOUNT
An open account transaction means that the goods are manufactured and delivered before payment is required (for example, payment could be due 14, 30, or 60 days following shipment or delivery). The method provides great flexibility and in many countries sales are likely to be made on an open-account basis if the manufacturer has been dealing with the buyer over a long period of time and has established a secure working relationship.
The open account method is a preferred settlement method of payment for the importer, since it places the risk on the exporter or seller. This method cannot be used safely unless the buyer is credit worthy and the country of destination is politically and economically stable. However, in certain instances it might be possible to discount open accounts receivable with a factoring company or other financial institution.
CASH IN ADVANCE
The Cash in Advance or Advance Payment method entitles advancement of cash from the buyer to the seller. Paying in advance offers the greatest protection for the exporter and places the risk on the buyer. Payment does not assure the shipment or delivery of the goods from the seller and the buyer will rarely put down cash up front before he reasonably assures himself that the goods will be shipped and that the type of goods ordered will be delivered.
Although this method of payment is not uncommon, requiring full payment in advance may cause lost sales to a foreign (or even another domestic) competitor who is able to offer more attractive payment terms. In some cases, however, where the manufacturing process is specialized, lengthy or capital-intensive, it may be reasonable to insist upon partial payment in advance, or on progress payments. This method is often too expensive and risky for foreign buyers, but useful when shipping to politically unstable counties, when the buyer's credit is unsatisfactory and when goods are custom made to customer's order.
WHAT IS A DRAFT OR DOCUMENTARY COLLECTION?
The draft, the demand for payment made by the seller on the buyer, together with shipping documents, are presented to the exporter's bank, and the collections department assists its client with payment settlement. In the typical collection process, the exporter draws a draft- or bill of exchange- on the buyer and presents it to his bank, so the bank in turn can forward it to the buyer through a collecting bank located in the buyer's country.
The draft drawn may require the buyer to pay the face amount either on sight (sight draft) or on a specified date in the future (time draft). If the trade draft is converted into cash at a lower price than the real face value before is it is paid, it is known as a Draft Discounting of Trade Acceptances.
When the draft is paid, the title documents are released to the buyer so he can obtain possession of the goods. Because title to the goods is not transferred until the draft is paid or accepted, both the buyer and seller are protected. However, nothing prevents the buyer from refusing a draft for payment.
In such cases, the exporter, who has already shipped the goods, faces the problem of getting his merchandise back, which may involve warehousing or insuring the goods, or even disposing of the merchandise at collection. If the buyer refuses or defaults on payment of the draft, the seller may also have to pursue collection through the courts (or possibly, by arbitration, if such had been agreed upon between the parties). The use of drafts involves a certain level of risk; but they are less expensive for the purchaser than letters of credit.
Sight Drafts
If the exporter and importer have agreed that payment should be made immediately upon receipt of the draft and/or shipping documents by the buyer's bank, the draft is said to be drawn at sight. When payable at sight, the collection procedure is known as documents against payment.
Time Drafts
If the exporter has provided credit terms to the buyer, thereby allowing the merchandise to be released before payment is received, it is called a time draft. The exporter will need a written promise from the buyer that payment will be made at a specified future date. When a bank receives time drafts, the bank is requested to deliver documents only against acceptance by the buyer. The buyer's acceptance of the draft is his agreement to pay at the agreed upon future date.
Draft Discounting of Trade Acceptances
In cases where a draft drawn by an exporter on a foreign importer is payable at a specific future date, the draft may be discounted by a bank so that the exporter may receive funds before the maturity of the acceptance date. The exporter receives less than the full face amount of the draft and the bank presents the trade acceptance to the importer's bank for full payment at maturity. Often, banks will discount the trade acceptance with recourse to the exporter. In such a case, the bank retains the right to demand payment from the exporter should the importer fail to honor the trade acceptance.
OTHER TERMS
Trade Finance Credit Insurance
Credit insurance protects you against non-payment of your exports by overseas customers. This financial tool helps exporters expand their businesses, allowing them to obtain short- medium- or long-term financing they need, while mitigating commercial and political risks. Both the Export-Import Bank of the United States and private insurance companies offer trade finance credit insurance.
Post-export Financing
Is a loan provided to businesses once the goods have been exported, based on the collateral of the receivable generated. This can be in the form of an insurance guaranteed receivable, open account receivable, draft or letter of credit.
Pre-export Financing
Is a loan provided to businesses that need working capital to purchase products for export, when the products have 51 percent or more U.S. content. One option is the Working Capital Guarantee Program of the Export-Import Bank of the United States. When the products to be exported contain 51 percent or more foreign content, trade finance companies and specialized banks will offer this type of financing.
Inventory Finance
Inventory finance is basically a line of credit issued to a supplier to finance foreign exports. By leveraging inventory, an exporter can offer buyers more attractive payment terms.
Factoring
Letters of credit work well for one-time transactions but are not the best way to finance repeat orders. Factoring may be a good alternative, providing the exporter with immediate cash and the buyer with flexible payment terms. In factoring, a business sells its approved accounts receivable to a factoring company (also known as a factor) and gets a cash advance for the amount outstanding. The factoring company retains a percentage of this amount until final payment of the invoice is made. The factor assumes responsibility for collecting payment and charges a fee of 2% to 7% of the total transaction. The percentage charged by the factor is on the higher end in the case of a non-recourse purchase, in other words, when the factor takes responsibility for foreign buyer defaults or other collection problems. Factoring is done on an ongoing basis: as you write new invoices they are factored, producing cash flow for your business.
