Information - Terms of Trade

ADVANCE : A drawdown or disbursement of funds according to the terms of an existing loan agreement. Advances are common to revolving credit facilities. The term can also refer to a customer paying its accounts payable prior to the agreed-upon date.

ADVISING BANK UNDER LETTERS OF CREDIT: The bank which receives a Letter of Credit or amendment to a Letter of Credit from the issuing bank [buyer’s bank] and forwards it to the beneficiary [seller/exporter] of the credit.

AGENT BANK: bank acting for a foreign bank.

AGGREGATE LIMIT OF LIABILITY: The total amount of the insurer’s liability under an insurance policy.

ASSIGNEE: A financing institution or individual or company designated by an insured exporter to receive all or part of the policy proceeds. The assignment must be acknowledged by the insured. An assignee has no greater rights than the insured under a policy.

ASSIGNMENT OF PROCEEDS FROM A LETTER OF CREDIT: The beneficiary of a Letter of Credit may irrevocably assign, to a party not directly named in the Letter of Credit, a portion of the proceeds of the L/C. While the assignment assures the assignee that he/she receives a portion of the proceeds under the L/C, it does not guarantee payment unless the shipment is made and all terms and conditions of the original L/C have been satisfied by the beneficiary. An assignment is possible regardless of whether the letter of credit is transferable.

AT SIGHT: Terms that designate payment upon demand. Under a Letter of Credit or draft it means payment is to be made upon presentation of certain documents [Letter of Credit] or presentation of draft.

BACK-TO-BACK LETTERS OF CREDIT: A beneficiary of a Letter of Credit opens up a new letter of credit on the basis of the letter of credit he/she has received.

BANKERS’ ACCEPTANCE: An acceptance drawn on and accepted by a bank that thereby becomes primarily liable to pay at the maturity date.

BANK RELEASE: A document issued by a bank, after it has been paid or given an acceptance, giving authority to a person to take delivery of the goods.

BENEFICIARY: The individual in whose favor a Letter of Credit is drawn. In a typical export transaction, the U.S. exporter/supplier is the beneficiary.
BILL OF EXCHANGE: An unqualified written order directing that a precise amount of money be paid to a specific person. The most common example of a bill of exchange is a draft.

BILL OF LADING DATE: A specific date a bill of lading is issued.

BILL OF LADING: A document issued by a transport company, which acknowledges the receipt of specified goods for transportation to a specific place. It also serves as the contract between the shipper [supplier/buyer] and carrier.

BROKER: An individual or firm who acts as agent for others in purchasing and selling. A broker may or may not charge for his/her services.

BUYER, PRIVATE: A foreign buyer that is not a sovereign public buyer.

CARGO AGENT: An agent appointed by an airline or shipping line to solicit and process international air and ocean freight for shipments. Cargo agents are paid commissions by the airline or shipping line.

CARRIER: An individual or firm which deals in transporting or conveying passengers or goods.

CASH AGAINST DOCUMENTS: Transactions where documents are sent to a third party, such as a bank or agent, with instructions not to release the documents, so that the importer/buyer is unable to take possession until the third party has received payment.

CASH IN ADVANCE: The seller/exporter requires payment from the buyer/importer prior to shipment of goods or services.

CASH PAYMENT: A specific quantity of the invoice or contract price, which the importer/buyer must pay the exporter/supplier prior to shipment of the goods or services.

CERTIFICATE OF INSPECTION: A document certifying that merchandise was in good condition at the time of inspection. Pre-shipment inspection is often a requirement for importation of goods into a country.

CERTIFICATE OF ORIGIN: A written statement attesting to the country of origin of goods.

CLEAN BILL OF LADING: A bill of lading acknowledged by the carrier for goods received “in apparent good condition” without damages or other irregularities.

COLLECTION: The process of presenting a negotiable instrument to the maker for payment.

CONFIRMING BANK UNDER LETTERS OF CREDIT: Confirmation is a process by which a bank adds its engagement to that of the opening bank. The confirming bank assumes the liability to pay under the Letter of Credit so long as the terms and conditions of the Letter of Credit have been met.

CONSIGNEE: An individual or firm to who merchandise has been consigned.

CONSIGNMENT: The buyer acts as agent for the seller/exporter, selling goods for “commission” and remitting the net proceeds to the seller as the goods are sold.

DEFERRED PAYMENT LETTER OF CREDIT: Sometimes referred to as a Usance Letter of Credit. Payment under the Letter of Credit is made a number of days after shipment/presentation of documents after a period specified in the Letter of Credit.

DIRECT COLLECTIONS: A method of obtaining payment for goods where the exporter/seller ships the goods to the buyer/importer but sends the collection directly to the importer/buyer designating payment through a specific financial institution.

DOCUMENTARY COLLECTIONS: A method of obtaining payment for goods or services where the exporter/seller ships the goods to the buyer/importer but instructs his/her bank to collect payment in exchange for the documents involved in the shipment [invoice, bill of lading, etc.]. Banks act only in a fiduciary capacity and do not make any commitment to pay the exporter/seller themselves. Documentary collections are subject to the UCC. There are two types of documentary collections:

DOCUMENTS AGAINST ACCEPTANCE: The documents are surrendered [by the bank] to the importer/buyer after the importer/buyer has accepted the accompanying draft, acknowledging the obligation to pay at a future date.

DOCUMENTS AGAINST PAYMENT: A sight draft to which title documents are attached. The documents are surrendered to the importer/buyer after he/she has paid the accompanying draft.

DRAFT: A written demand signed by the exporter/supplier which requires the importer/buyer or the importer/buyer’s bank to pay on presentation or at a fixed future time a sum certain in money to the order of the payee which may be the exporter/supplier or the exporter/supplier’s bank. SIGHT DRAFT is payable when presented. TIME DRAFTS [also called usance drafts] are payable at a future fixed date or determinable [30,60,90 days, etc.] date.

IMPORTER: The individual, firm or legal entity that, in the course of trade, brings articles of trade from a foreign source into a domestic market.

INSURANCE COVERAGE: Total amount of insurance carried.

INSURANCE POLICY: Entire written contract of insurance.

INSURANCE PREMIUM: The amount paid to an insurance company for coverage under an insurance policy.

INSURED: The person[s]/company[s] protected under an insurance policy.

INSURER: The party to the insurance contract, which promises to indemnify losses or provide service; the insurance company.

INVOICE: A document, which includes, inter alia, an itemized list of goods shipped or servers rendered, with an account of all of costs involved as well as payment and trade terms.

INVOICE DATE: The date the invoice is issued.

IRREVOCABLE LETTER OF CREDIT: A letter of credit which cannot be amended or canceled unless all parties involved in the Letter of Credit agree to the amendment or cancellation prior to any action being taken..

ISSUING BANK: The buyer/importer’s bank that establishes a letter of credit.

LETTER OF CREDIT [L/C]: A legal instrument issued by a bank to a beneficiary [seller/exporter] on behalf of a buyer/importer by which the bank substitutes its own credit for that of the buyer/importer. The seller/exporter receives assurance of payment from the applicant’s bank before proceeding with the shipment. After shipment and upon receipt of proper documentation, outlined in the L/C, the bank will pay the beneficiary. Also known as a documentary letter of credit.

LIBOR: London Interbank Offered Rate.

LIEN: A legal right granted by the authority of a court to control or to enforce a charge against another’s property until some legal claim is paid or otherwise satisfied.

LOSS: For insurance policies, the portion of an amount in default, the insured percentage of which is subject either to application of a deductible or to indemnification.

MARGIN: The difference between the market value of collateral pledged to secure a loan and the amount the bank will advance against the collateral.

NEGOTIABLE BILL OF LADING: Bill of lading transferred by endorsement.

NEGOTIATION: Under a Letter of Credit, the process whereby a bank gives value for the exporter/supplier’s draft or documents. Negotiation generally includes checking the documents to ensure they meet the terms and conditions of the Letter of Credit; the documents conform to each other and are compatible with the UCP; and each individual document appears to be properly prepared.

OCEAN BILL OF LADING: A receipt for the cargo and a contract for transportation between a shipper and the ocean carrier.

PARI PASSU: Credit facilities in which two or more lenders are accorded equal treatment under a loan agreement. Most frequently applied to collateral, but may also refer to loan structure, documentation, maturity or any other substantive condition.

PREMIUM AMOUNT: The cost to purchase insurance.

PRO FORMA INVOICE: An invoice provided by the exporter/supplier to the importer/buyer, which is used as a preliminary invoice together with a quotation.

PROMISSORY NOTE: A negotiable instrument that is evidence of a debt between the borrower and the creditor. where the borrower promises to pay a specific amount on specific date[s] at a defined rate of interest.

RED CLAUSE LETTER OF CREDIT: A type of Letter of Credit, which provides shipper/exporter with some funds prior to shipment to finance production of the goods.

REVOLVING CREDIT FACILITY: A loan agreement that allows the borrower to frequently draw down and repay advances. The proceeds are usually used to support the working capital needs of the borrower. A borrowing base requirement in the loan agreement commonly mitigates the Lender’s credit risk.

REVOLVING LETTER OF CREDIT: A type of Letter of Credit where the issuing bank to restores the Letter of Credit to the original amount after it has been drawn down.

SHIPMENT DATE: The date the goods are considered enroute to their destination.

SHIPPERS EXPORT DECLARATION: A form required by the US Treasury Department and completed by the exporter/shipper showing the value, weight, consignee, destination, etc., of export shipments with declared value greater than $2,500.

SIGHT DRAFT: A draft that is payable upon presentation to the drawee on sight or on demand. See DRAFT

SIGHT PAYMENT: Under Letter of Credit, payment on receipt of the documents by the issuing bank or the negotiating or confirming bank.

STANDBY LETTER OF CREDIT: A Letter of Credit that can be drawn against only if certain performance does not take place. This type of letter of credit is primarily a payment or performance guarantee. It is used primarily in the United States as U.S. banks are prohibited by law from giving certain guarantees.

TIME DRAFT: A draft [ also known as a usuance draft] which is payable at a fixed or determinable future time.

TRANSFER RISK: Currency measures taken by a foreign government, which make it impossible for the importer/buyer to transfer foreign exchange abroad.

TRANSFERABLE LETTERS OF CREDIT: A Letter of Credit, which enables the beneficiary [exporter/supplier] to transfer portions of the credit to another party.

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