Trade Finance Jargon Buster
19/Aug/2014 • International Trade•
International trade can be incredibly complex and some terms don’t seem to make much sense. Like INCO terms or Irrevocable Re-imbursement Undertakings. Here is a list of some common technical words that we’ve tried to explain as simply and accurately as we can. It is not a complete list of all the terms you might come across but it should help you navigate the basics.
If you can’t find the information you need, please do not hesitate to get in touch on 02036 276 010.
The buying cycle
Back-end of the buying cycle – Where Invoice Finance sits in the buying process. In the relationship between buyer and end customer. (See Invoice Finance).
Front-end of the buying cycle – Where Ebury Trade Finance operates. In the relationship between buyer and supplier.
Credit risk – The risk that a buyer or seller will not complete a deal due to their inability to meet their obligations, or a deterioration in their financial position.
Non-recourse payment – A payment where the company is only entitled to repayment from the profits of that purchase, not from the other assets of the payee.
Working capital – Current assets minus current liabilities. Working capital measures how much in liquid assets a company has available. Companies that have a lot of working capital can expand and improve their operations and thereby are more often successful. Companies with negative working capital may lack the funds to support their growth.
Avalisation – The guarantee of acceptance by a third party. Typically a bank will guarantee to honour a payment through the avalisation of a Bill of Exchange drawn on them by their client in favour of a third party.
Beneficiary – An individual, institution, trustee, or estate which receives benefits under a will, insurance policy, retirement plan, annuity, trust, or other contract.
Documents of Title – Documents that confer the status of ownership upon the holder of the document e.g. the holder of a correctly endorsed Bill of Lading has effective ownership of the goods.
INCO terms (international contract trade terms) – These are official trade shipping terms agreed by the International Chamber of Commerce, these establish the responsibility of the buyer and seller in a transaction.
Letter of Indemnity – A form of bank guarantee that is issued on behalf of the buyer in favour of the shipping line against their delivery of goods, this will often replace an original Bill of Lading when presenting documents under certain letters of credit, notably in oil transactions.
Promissory Note – A signed document from one party containing a promise to pay a defined sum to specified person or company at a specified future date, in international trade these typically take the form of a Bill of Exchange (see below).
Finance and Trade options
Bank Guarantees – these can take various forms (performance, payment, standby) and are typically governed by the Uniform Rules for Demand Guarantees or the International Standby Practices.
Bill of Exchange – This is an unconditional order in writing drawn up by the seller asking the buyer to pay a specific amount of money immediately or at a future date.
Bills of Collection – By presenting documents through a bank on a collection basis, a seller can ensure that title to the goods being shipped (and the possession of the goods) cannot be transferred to the buyer before payment has been made. This process is governed by the Uniform Rules for Collections.
Invoice Finance – Discounting of a customer invoice in order to obtain a cash advance, typically suppliers will grant their buyers payment terms of 1 to 3 months.
Irrevocable Re-imbursement Undertakings – Interbank guarantees of payments, typically used in support of a negotiable instrument such as a Letter of Credit. The operation of these is governed by the Uniform Rules for Bank-to-Bank Reimbursements.
Letter of Credit – Secured credit, primarily offered by banks. This is a sequence of escrows financing the exchange via an advising and issuing bank. It is an irreversible guarantee given by the buyer’s bank to pay a specific amount of money immediately or on a future date to the seller when he or she presents specific documents before a certain date. The documents must be presented in strict conformity with the terms and conditions of the letter of credit, the operation of which is governed by the Uniform Customs and Practice Rules for Documentary Credits issued by the International Chamber of Commerce.
Overdraft – Can be unsecured or secured. A revolving credit facility for general purposes, can be used for purchasing.
Trade Finance – Unsecured lending facility on various terms. Ebury Trade Finance offers up to £1,000,000 for up to 120 days with no set up or maintenance costs.
Air Waybill – Transport document when shipping goods by air, this is evidence of the freight agreement and a receipt for the goods, unlike a Bill of Lading (see below) this is not a document of title.
Bill of Lading – Transport document for shipment of goods by sea. This is issued by the carrier and consigned to the order of the owner of the goods (usually the buyer). This is a document of title and the buyer will need to present this document in order to take possession of goods.
Charter Party Bill of Lading – This type of Bill of Lading do not contain full conditions of carriage; these are detailed in a separate charter party agreement. Bills of Lading of this type are generally not acceptable under a Letter of Credit unless specifically allowed.
Multimodal Transport Document – When goods are carried by more than one mode of transport (often in containers) a combined (multimodal) transport document is recommended as the multimodal transport operator accepts liability for carriage of the goods throughout the journey. This is particularly useful when shipping goods to landlocked countries which necessitate the shipment to be routed through a third country.
Railway Consignment Note – A transportation document which identified the goods in a shipment to be transported by rail and certifies that these goods have arrived at the railway in an undamaged condition. The consignment note is delivered by the company responsible for transporting the goods to the railway carrier.
Truck Waybill (CMR) – Convention on the Contract for the International Carriage of Goods by Road. The CMR, also known as CMR Waybill, regulates the carriage of all kinds of goods by truck. It is used if the location at which goods are accepted and the location at which the goods are delivered are in two different countries. At least one of the countries has to be a CMR member. This applies irrespective of the residence or nationality of the parties. The convention applies in all member countries of the European Union and some other countries.
Credit Insurer – Protects businesses offering finance options against both commercial and political risks that are beyond their control. Credit insurance allows credit extension to new customers. Trade credit insurance is for short-term account receivables i.e. those due within 12 months.
SWIFT – This is an inter-bank communication and payment system which stands for Society For Worldwide Interbank Financial Telecommunications. It helps to get rid of human errors and reduces the length of time it takes to send messages between banks.
If you think your business could benefit from Ebury Trade Finance, apply online now.