Glossary of Trade and Payment Terms
Glossary of Trade and Payment Terms
Glossary of Trade and Payment Terms
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ACCEPTANCE:
Under a Letter of Credit, an acceptance drawn on and accepted by a bank that thereby becomes primarily liable to pay on the maturity
date.
ACCOUNTS PAYABLE:
A current liability representing the amount owed by an individual or a business to a creditor for merchandise or services purchased on
open account or short-term credit.
ACCOUNTS RECEIVABLE:
Money owed a business for merchandise or services bought on open account. Accounts receivable arise from the business practice of
providing customer merchandise or a service with the expectation of receiving payment per specified terms. The terms are included
on the seller’s invoice to the buyer with no written evidence of debt executed between seller and buyer.
ACQUISITION LOAN:
A loan to assist in acquiring the assets of a business.
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.
ADVANCE RATE:
The maximum percentage that the lender will lend against a type of collateral. The advance rate will vary by the type of collateral,
terms, age, and perhaps the financial strength of the obligated party.
AFFILIATES:
Business entities that have common ownership, common management, or contractual relationships that give one control over the
other.
AGENT BANK:
bank acting for a foreign bank.
AGING [SCHEDULE]:
A periodic report listing a borrower’s accounts receivable or payable balances, by customer or supplier, detailing the current status or
delinquency of the balances owed or owing. The report is usually used in determining the borrower’s compliance with the borrowing
base requirements in the loan agreement.
differentiated from other types of lending secured by accounts receivable and inventory by the Lender’s use of controls over the
borrower’s cash receipts and disbursements and the quality of collateral.
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:
Transfer of interest and benefits of a financial instrument to a third party.
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.
AVAILABILITY:
The additional funds that the Lender will advance under the terms of the credit facility. The amount is often the difference between
the loan commitment amount and the outstanding balance of the credit facility. In most cases, the terms of the credit agreement limit
the amount available if the commitment amount is greater than the borrowing base.
AVAL:
The guarantee of an individual or a financial institution on a financial instrument which in effect makes the guarantor the primary
obligor in the eyes of all subsequent holders of the financial instrument.
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:
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.
BLANKET ASSIGNMENT:
An agreement giving the lender a security interest in all of assets owned by the borrower. As used by some lenders, the term is meant
as a catch-all security interest covering every anticipated type of asset owned by the borrower. To perfect the lender’s security interest
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in the borrower’s personal property, the lender must file a financing statement describing the collateral in all of its locations. To
perfect the Lender’s security interest in all real or titled property, the Lender must specify the assets in the appropriate documents and
must file the documents in the proper jurisdiction. If the assets are already encumbered and the borrower has limited equity in them,
the Lender may not expend the resources to perfect its security interest in the borrower’s real and titled property.
BORROWING BASE:
A collateral base, agreed to by the Borrower and Lender, which is used to limit the amount of funds the Lender would advance the
Borrower. The Borrowing base specifies the maximum amount that can be borrowed in terms of collateral type, eligibility and
advance rates.
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 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.
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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.
CHARGE-BACK:
An amount of money that is owed to the factor and is deducted or Charged-Back from the reserve or availability of the line due to an
agreed upon non-payment by debtor clause in the Factors contract.
COLLECTION:
The process of presenting a negotiable instrument to the maker for payment.
COMMERCIAL RISK:
Any risk of default not defined as political risk. Commercial risk may result from deterioration in a buyer’s/importer’s market,
fluctuation in demand, buyers insolvency, etc.
COMPLIANCE CERTIFICATIONS:
The Borrower’s statement certifying its adherence to the terms of the loan agreement during the stated period. The company’s
principal financial officer usually completes the certificate. If the Borrower is in compliance with the terms of the loan agreement [no
event of default has occurred], the principal financial officer will attest accordingly. Supporting data is usually required to document
the assertion.
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.
CONTRA-ACCOUNTS:
Contra-Accounts arise when a borrower has both accounts receivable and accounts payable with the same entity because the party is
both a customer and a supplier of the Borrower. These accounts are usually considered ineligible collateral.
CONVERTIBLE CURRENCY:
Currency that can be easily exchanged, bought/sold for other currency.
CREDIT RISK:
Credit risk is the current and prospective risk to earnings or capital arising from an obligor’s failure to meet the terms of any contract
with the Lender or otherwise fail to perform as agreed. In trade finance, many transactions are self-liquidating or supported by Letters
of Credit, insurance and guarantees.
CROSS-AGING:
The practice of making all of the accounts receivable from a single account party [the obligated party for an account receivable]
ineligible to be included in the borrowing base if a specified proportion of the total accounts receivable from that party is delinquent.
Also, sometimes referred to as the “10 percent rule” since a common delinquency threshold is 10 percent; however, can go higher.
CROSS-COLLATERALIZED:
In the event of default, the collateral of cross-collateralized loans is used to satisfy the debts. In most instances the collateral is shared
on a pari passu basis. The terms of the loan agreement can also specify that only the excess collateral of one loan can be shifted to
satisfy another.
CROSS DEFAULT:
The right to declare a loan in default if an event of default occurs in another loan.
Customer: The client's customer. The company which pays the money due under the factored invoice. Also known as the account
debtor.
Debtor: The customer of a factor's client. The company owing the money due on the invoices. Also known as the customer.
DEDUCTIBLE:
The amount of loss under specified risks that are incurred by the insured for its own account for each policy period.
any additional costs and to bear any risks caused by his failure to clear the goods for import in time. This term may be used
irrespective of the mode of transport.
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 PAYMENT and DOCUMENTS AGAINST ACCEPTANCE.
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.
DILUTION:
The amount of risk associated with collection of the accounts receivable. It can include returns, charge-backs, trade allowances,
concentrations, slow pay, bad debt and other perceived risk.
DUE DILIGENCE:
Background check and research conducted by the factor to assess validity of a prospective factoring client and that client's customers.
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ELIGIBLE COLLATERAL:
A defined term in the loan agreement that controls what collateral can be included in the borrowing base.
EX WORKS [EXW]:
“Ex works” means that the seller fulfills his obligation to deliver when he has made the goods available at his premises (i.e. works,
factory, warehouse, etc.) to the buyer. In particular, he is not responsible for loading the goods on the vehicle provided by the buyer
or for clearing the goods for export, unless otherwise agreed. The buyer bears all costs and risks involved in taking the goods from the
seller’s premises to the desired destination. This term thus represents the minimum obligation for the seller. This term should not be
used when the buyer cannot carry out directly or indirectly the export formalities. In such circumstances, the FCA term should be
used
FACTOR:
An individual or firm that purchases another individual or firm’s account receivables at less than the receivables value and collects
the full value. This is an arrangement in which a company shortens its cash cycle by selling its accounts receivable with or without
recourse to a third party known as a “factor”.
FACTORING:
The selling of a company's accounts receivable to a third party, in order to obtain funding.
FACTORS COMMISSION:
The fee the Factor Charges for funding the clients A/R.
FACTORS RESERVE:
A deposit maintained by the factor, to guard against disputes between the client and the customer, and to guard against bad debt
losses due to customer non-payment. This is the money retained by the factor when the advance is sent to the client. The Reserve is
sent to the client after the customer has paid the factor the money due on the invoice.
FACTOR VERIFICATION:
Process by which the factor verifies that the product or service provided by the client was received and accepted by the customer, and
that the customer intends to pay the factor the money due under the invoice. This process takes place before the factor sends the
advance to the client.
FORFEITING:
The purchase of trade obligations falling due at some future date without recourse to any previous holder of the obligation. Under a
typical arrangement, an exporter/supplier receives immediate cash by discounting promissory notes or trade receivables on a “without
recourse” basis to a specialized finance firm called a “forfaiter”.
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FORMULA:
A calculation to determine the borrowing base in which a margin or advance rate is applied to each type of collateral.
FULL FOLLOWING:
A term describing the process Asset Based Lenders use to closely control credit availability and collateral by means of a borrowing
base, control of the cash receipts and field audits.
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.
INCOTERMS:
Trade terms published by the International Chamber of Commerce which define the respective duties of the exporter/supplier and
importer/buyer in international transactions. The 13 incoterms are: Ex Works; Free Carrier; Free Alongside Ship; Free On Board; Cost
and Freight; Cost, Insurance and Freight; Carriage Paid To; Carriage and Insurance Paid to: Delivered at Frontier; Delivered Ex Ship;
Delivered Ex Quay; Delivered Duty Unpaid; Delivered Duty Paid. See individual listings for definitions.
INELIGIBLE COLLATERAL:
Pledged receivables or inventory that does not meet the criteria specified in the loan agreement. Ineligible collateral remains part of
the Asset Based Lender’s collateral pool; however, it does not qualify for inclusion in the borrowing base.
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.
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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.
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.
LIQUIDATION VALUE:
The most likely price an asset will bring if it is sold without reasonable market exposure and when the seller is under duress.
Sometimes the liquidation value is based on an orderly liquidation that allows for a brief marketing period as contrasted with a forced
liquidation value that is based on an auction sale.
LOCK BOX:
A cash management product offered by financial institutions that accelerates a client’s collection of receivables. The client’s
customers are directed to make payments or wire transfers to a specific account at the Lender. Lender’s use lock boxes in asset based
financing to control cash receipts.
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.
MARKET VALUE:
The most likely price an asset will bring if it is sold in a competitive, open market, with reasonable market exposure and willing,
informed buyers and sellers.
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.
NOTIFICATION LETTER:
A form sent to the client's customer by the factor, confirming that the client's invoice does exist and that the customer will remit the
payment due under that invoice to the factor.
OPEN ACCOUNT:
The seller/exporter supplies terms of payment to the buyer and ships the merchandise prior to receiving payment.
OPERATING CYCLE:
The period of time it takes a business to convert purchased and manufactured goods and services into sales, plus the time to collect
the cash from the associated sales.
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.
POLITICAL RISK:
Risk of default due to cancellation of an import or export license, war, expropriation, confiscation or intervention or transfer risk.
Consult your specific policy for definition.
PREMIUM AMOUNT:
The cost to purchase insurance.
PREMIUM RATE:
Depending on the insurance company the cost per $100 or insured amount.
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.
RECOURSE:
In this type of factoring, the risk of customer non-payment remains with the client. If the client's customer is financially unable to pay
the money due under the invoice, the factor has recourse against the client for that money. The factor is protected against customer
non-payment.
SECURITY AGREEMENT:
A document giving a Lender a security interest in assets pledged as collateral. This agreement, signed by the Borrower, describes the
collateral and its location in sufficient detail so the Lender can identify it, and assigns to the Lender the right to sell or dispose of the
assigned collateral if the Borrower is unable to pay the obligation.
SHIPMENT DATE:
The date the goods are considered enroute to their destination.
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.
TIME DRAFT:
A draft [ also known as a usuance draft] which is payable at a fixed or determinable future time. See DRAFT
TRADE FINANCE:
A bank term for financing export sales which includes, inter alia, Letters of Credit, drafts, forfeiting, factoring, structuring, pre-
export, post-export, and receivables.
TRADE NAME:
The name under which a firm conducts business.
TRADE TERMS:
The terms of a sale, which include price, responsibility for shipping, insurance and customs duties.
TRANSACTION RISK:
Transaction risk is the current and prospective risk to earnings or capital arising from fraud, error and the inability to deliver products
or services, maintain a competitive position and manage information. Transaction risk is evident in each product and service offered.
Transaction risk encompasses: product development and delivery, transaction processing, systems development, computing systems,
complexity of products and services and the internal control environment.
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TRANSFER RISK:
Currency measures taken by a foreign government, which make it impossible for the importer/buyer to transfer foreign exchange
abroad.
USUANCE:
The time allowed for payment of an international obligation. A usuance credit is credit available against time drafts.
WORKING CAPITAL:
Loans for business expenses such as, advertising, wages, rents, and other operational costs. Often these loans are secured by tangible
assets or, in the case of long-standing good credit, by the "full faith and credit" of the company.