Glossary Terms

Documentary Collection involves banks facilitating payment collection from buyers in exchange for shipping documents. This process includes Documents Against Payment (D/P) and Documents Against Acceptance (D/A).

Banks act as intermediaries during the transaction. They present shipping documents to buyers and collect payments or acceptances.

Documents Against Payment (D/P) require buyers to pay before receiving shipping documents. Documents Against Acceptance (D/A) allow buyers to accept a time draft before receiving documents.

Sellers rely on banks to ensure secure transactions. Banks verify documents and manage collections, reducing risks for both parties.

Examples of shipping documents include bills of lading, invoices, and insurance certificates. These documents ensure that buyers receive the agreed-upon goods before making payments.

In Documentary Collection, strict adherence to terms safeguards both buyers and sellers. This method guarantees that shipping documents correspond with the buyer’s payment or acceptance, securing the trade process effectively.

Documentary Credits are letters of credit that assure the seller of payment upon presenting required documents, reducing the need for seller financing and providing liquidity.

Documentary Credits as Financing Devices guarantee payment to sellers upon submission of specified documents like bills of lading, insurance certificates, and invoices. This process mitigates the seller’s risk.

Banks issue Documentary Credits, which act as a financial promise to pay the seller upon meeting stipulated conditions. They facilitate smoother international trade.

Using Documentary Credits, sellers can obtain working capital since they can rely on the assured payment. Buyers gain credibility and the assurance that goods will be dispatched as agreed.

Common types of Documentary Credits include revocable, irrevocable, confirmed, and unconfirmed credits. Revocable credits can be altered without the seller’s consent. Irrevocable credits cannot be changed without agreement from all parties. Confirmed credits involve a second bank guaranteeing payment, whereas unconfirmed credits do not.

Documentary Credits reduce the need for advance payments or seller financing, easing cash flow constraints. They streamline export transactions and enhance trade relationships by fostering trust and reliability.

Documentary Credits mandate precise documentation, ensuring compliance with agreed terms, thus minimizing disputes.

Evergreen Letter of Credit: An L/C that automatically renews for an additional period unless terminated by one of the parties, useful for ongoing, long-term trade relationships.

Commercial Contexts: International trade agreements, supplier contracts, and export financing.

Parties Involved: Buyers, sellers, issuing banks, and advising banks.

Renewal Cycle: Monthly, quarterly, or annually.

Termination Process: Written notification required by either party.

Benefits: Reduces administrative burden, secures long-term supplier relationships, stabilizes cash flow.

Examples: Steel imports, machinery exports, agricultural product shipments.

Usage Criteria: Established trade relations, predictable transaction volumes, stable economic conditions.

Documentation: Trade agreements, invoices, shipping documents, inspection certificates.

Jurisdictional Considerations: Compliance with international trade laws, governing local banking regulations.

Obligations: Adherence to international commerce codes, prompt dispute resolution, rigorous record-keeping practices.

Factoring involves selling accounts receivable to a third party (factor) at a discount. The factor collects the receivables and provides immediate cash flow to the seller. Factoring can be with recourse, where the seller retains some risk. It can also be without recourse, where the factor assumes all risk.

Examples of Factoring Companies include Bibby Financial Services, ALTLINE, and RTS Financial.

Types of Factoring: Recourse Factoring, Non-recourse Factoring.

Benefits of Factoring: Immediate cash flow, reduced credit risk (in non-recourse).

Applications: Used by small businesses, large corporations, and startups.

A Financial Guarantee is a non-cancellable indemnity bond backed by an insurer or a bank that ensures repayment of principal and interest on financial obligations if the borrower defaults.

Examples:

• Mortgage loans
• Corporate bonds
• Municipal bonds
• Lease agreements

A Financial Standby is a standby letter of credit issued to support a specific financial obligation of the applicant. Banks, corporations, and governments use Financial Standbys to provide a guarantee that obligations will be met in specific scenarios, such as non-payment or default on a loan.

Examples include:

1. Loan repayment guarantees.
2. Commercial paper obligations.
3. Lease payment assurances.
4. Bond performance guarantees.

A Financial Standby specifies exact numeric values for obligations. Details include the beneficiary’s right to draw funds upon predefined conditions being met.

Forfaiting involves the purchase of receivables from exporters by a forfaiter. The forfaiter assumes the risk and responsibility of debt collection. This process provides the seller with immediate cash flow and eliminates credit risk.

Forfaiters purchase receivables, such as promissory notes, bills of exchange, and letters of credit. Buyers, such as banks and financial institutions, guarantee these financial instruments. Exporters benefit from non-recourse financing, immediate liquidity, and reduced administrative burdens.

Industries, including machinery manufacturing, construction, and shipping frequently use forfaiting. Transactions often involve medium to long-term credit, typically ranging from 180 days to five years. Countries with significant forfaiting activity include Germany, Switzerland, and the United States.

Forfaiting utilizes instruments, including avalized bills of exchange, promissory notes, and deferred-payment letters of credit. These instruments guarantee payment, shifting risk from exporters to forfaiters. Exporters achieve improved cash flow and offload credit risk to specialized financial entities.

Forfaiting with Recourse involves the seller retaining some risk. The forfaiter can demand repayment if the debtor fails to pay.

In forfaiting transactions, sellers and forfaiters execute agreements where recourse conditions dictate the risk allocation.

Under this arrangement, the seller remains liable for part of the debt if the debtor defaults, providing security and reducing the forfaiter’s risk exposure.

Examples of significant instances include situations where the buyer, identified by specific invoices or trade documentation, defaults on payment obligations.

Such transactions often involve structured clauses where repayment conditions clarify the extent of the seller’s liability.

Commercial forfaiting agreements may list repayment schedules, contingent liabilities, and the debtor’s risk profile for clarity and enforcement.

In practice, forfaiting with recourse often applies to international trade scenarios where credit risk remains high for the forfaiter without seller liability guarantees.

This method aligns with ensuring forfaiters manage risk while financing trade, particularly in situations demanding rigorous credit scrutiny.

Forfaiting without Recourse involves selling receivables to a forfaiter, who takes on full risk of non-payment by the debtor, freeing the seller from liability. This arrangement ensures the seller’s financial protection.

Forfaiting provides liquidity by converting receivables into cash. The forfaiter pays the seller immediately, deducting a discount as a fee. The process includes purchasing medium to long-term receivables.

The forfaiter assumes risks including credit risk, political risk, and currency risk. For example, political instability in the debtor’s country, or exchange rate fluctuations fall under the forfaiter’s responsibility.

Forfaiting transactions typically involve bills of exchange, promissory notes, or Deferred Payment Letters of Credit. Each financial instrument represents a commitment by the debtor to pay at a future date.

Key characteristics of forfaiting include:

1. Non-recourse basis: The seller bears no risk post-sale.
2. Fixed rates: Interest and fees are pre-determined.
3. Medium to long-term receivables: Commonly ranging from 180 days to 10 years.

When a debtor defaults, the forfaiter cannot reclaim funds from the original seller. This attribute differentiates forfaiting from factoring with recourse, where the seller retains some risk.

In forfaiting, involved parties may include exporters, importers, primary forfaiters, and secondary forfaiters. Exporters sell receivables; primary forfaiters initially purchase them; secondary forfaiters acquire receivables from primary forfaiters.

Forfaiting transactions are documented through trade finance documents which define terms, conditions, and obligations of involved parties. This provides legal clarity and enforceability in case of disputes.

Common industries using forfaiting include manufacturing, telecommunications, infrastructure, and commodities. Each sector benefits by receiving immediate cash flow, mitigating risks related to international trade.

Currency risk management in forfaiting ensures settlements in stable currencies like USD, EUR, or GBP, reducing potential losses from exchange rate volatility.

Forfaiting’s non-recourse nature makes it a preferred method for export financing. Benefits include improved cash flow, risk mitigation, and streamlined trade operations.

A Green Clause Letter of Credit is an extension of a Red Clause Letter of Credit. It allows advances for expenses, such as storage, insurance, and freight, beyond just the purchase of goods.

An Insurance Certificate is a document issued by an insurance company that certifies a shipment’s coverage under a marine insurance policy. It details the terms, insured value, risks covered, and duration of coverage.

Irrevocable Letter of Credit

An Irrevocable LettLetter of Credit (L/C) is a financial document that ensures payment to the seller and cannot be changed or canceled without the consent of all involved parties. All parties include the buyer, seller, and issuing bank. The terms remain fixed, providing a firm guarantee of payment.

Banks issue Irrevocable Letters of Credit to provide security in international trade. These letters often stipulate specific documentation requirements, like shipping certificates or commercial invoices. Compliance with these requirements ensures release of funds by the bank.

Firms commonly use this form of L/C in transactions involving large sums, such as international shipments of bulk commodities or high-value machinery. The instrument is crucial for mitigating risks in deals involving geographical or political uncertainties.

In the event of disputes, Irrevocable Letters of Credit offer recourse through established legal channels. This adds a layer of protection, making them preferable in complex, cross-border trades.

Examples of usages include oil and gas contracts, agricultural exports, and electronics shipments. Each instance demands meticulous adherence to terms, ensuring contractual obligations are met.

An Issued Letter of Credit is a financial document formally established and delivered by the issuing bank.

It guarantees that the seller will receive payment from the buyer upon fulfilling specific terms. Major types include:

• Commercial Letters of Credit: Used in trade transactions.
• Standby Letters of Credit: Serve as a safety net.
• Revolving Letters of Credit: Permit multiple transactions within a fixed period.

Banks like JPMorgan Chase, Bank of America, and Citibank typically issue these documents.

A Letter of Credit (L/C) is a financial document issued by a bank guaranteeing that a seller will receive payment from a buyer upon presentation of the specified documents in compliance with the L/C terms.

Banks such as Citibank, HSBC, and JPMorgan issue L/Cs. Required documents include commercial invoices, bills of lading, and insurance certificates. Letters of Credit facilitate international trade by ensuring payment security for both buyers and sellers. Different types include sight L/Cs, which demand immediate payment upon document presentation, and time L/Cs, which allow deferred payment. Other examples are standby L/Cs and revolving L/Cs.

Liability Insurance protects against claims for injuries and damage to people or property. It covers legal costs and payouts for which the insured is responsible. For instance, it includes coverage for medical expenses, repair costs, and legal fees. Types of Liability Insurance include General Liability, Professional Liability, and Product Liability. Businesses and individuals use these to safeguard assets and ensure financial stability.

Marine insurance covers the loss or damage of ships, cargo, terminals, and any transport or cargo involved in transferring property between origin and destination points. It includes perils of the sea, theft, and natural disasters.

Marine insurance policies protect cargo, ships, terminals, and transport methods. Examples include ocean liners, container ships, and port facilities. Coverage also extends to risks such as shipwrecks, piracy, waves, and earthquakes.

Cargo insurance insures goods transported by sea, like electronics, clothing, and machinery. This protects against loading-related damages, inclement weather, and hijacking.

Hull insurance covers physical damage to ships. Examples include fishing vessels, tankers, and cruise ships. Coverage includes collisions, fires, and capsizing incidents.

Marine liability insurance safeguards against legal liabilities. It applies to shipowners, operators, and seafarers. This addresses cargo claims, crew injuries, pollution, and wreck removal.

War risk insurance covers damage due to war-related activities. It protects against mines, torpedoes, and military actions.

Freight insurance covers financial loss from undelivered cargo. It insures shipping companies, freight forwarders, and cargo owners. This addresses shipping delays, route diversions, and vessel seizures.

Marine reinsurance mitigates risks for insurers. Examples include treaty reinsurance, facultative reinsurance, and surplus share reinsurance. This supports underwriting, strengthening financial stability, and preventing large losses.