20 trade finance terms you need to know

01/12/2017

trade finance terms

trade finance termsTo succeed in exporting and importing, trade professionals must understand the strategies and knowledge required for successful international trade transactions. The success and timeliness of these transactions impact an organization’s bottom line and are more likely when the organization has knowledge of payment options, risk mitigation strategies, contracts and effective cash flow management, as well as techniques and plans to manage disputes should they arise.

An important part of learning these strategies and skills is knowing how to speak the language of international trade finance, as it’s filled with specialized terminology that may trip up even more experienced professionals from time to time.

Can’t remember or don’t know what a specific trade finance term means? Here are 20 helpful definitions to make your next transaction or negotiation go more smoothly.

1. Accounts receivable insurance (ARI)

An insurance policy purchased from a financial institution or export credit agency (ECA) that exporters may obtain to help secure their receivables in case of non-collection. Accounts receivable insurance can also help maintain regular cash flow.

2. Advance payment

A payment to a seller in advance of the goods being shipped. Reasons for adopting this payment method include lack of finance to buy and/or prepare the goods for shipment or that exporters are unwilling to ship goods to the country of the buyer for reasons of country risk, or that the seller may not have the finance to buy and/or prepare the goods for shipment. Exporters sometimes require advance payments by importers as protection against non-payment or to purchase supplies to fulfill the order. In addition, higher advance payments may be required for specialized products, as a hedge against buyer default when it may be more difficult or not possible to sell the products to a secondary buyer.

3. Beneficiary

Someone who is eligible to receive distributions from an insurance policy or some other form of trade finance instrument. Beneficiaries are either named specifically in these documents or they have met the stipulations that make them eligible for whatever distribution is specified.

4. Blocked currency

A currency that is not available to be exchanged for any other currency, usually due to restrictions from the national government, also referred to as non-convertibility/transferability of currency.

5. Contingency plan

An activity undertaken to plan the proper and immediate follow-up steps to be taken by management and employees in an emergency. Its major objectives are to ensure containment of damage or injury to, or loss of, personnel and property, and continuity of key operations of the organization.

6. Crown corporation

A corporation that is established and regulated by a country’s state or government. A Crown corporation is commercially owned by the government. Civil servants partially control and operate this type of company, which is meant to serve the public interest as determined by the current government.

7. Demurrage

Charges incurred when a shipment must be stored in a warehouse during transit from the exporter to the importer. These charges may be incurred in the event of dispute between parties to a letter of credit (L/C) and can become substantial in a short period of time.

8. Exchange rate

The price of one currency in terms of another, i.e. the number of units of one currency that may be exchanged for one unit of another currency as in 1 GBP (British Pound Sterling) = 1.65 CDN (Canadian Dollar).

9. Expropriation

The act of taking possession of private property for government purposes.

10. International Chamber of Commerce (ICC)

A Paris-based organization that plays a key role in international trade through its Uniform Customs and Practice for Documentary Credits (UCP) and other quasi-regulatory articles that provide the infrastructure for trade among over 160 nations that have voluntarily agreed to be bound by these articles. The ICC has several key expert groups, and provides interpretations and opinions on the UCP as well as arbitration services in the event of disputes between parties involved in international commerce.

11. Incoterms® rules

A set of standardized and internationally recognized trade terms established by the International Chamber of Commerce (ICC). They are routinely referenced in contracting and trade finance, and are critical for resolving contractual disputes.

12. Price ceiling

A limit imposed through legislation to control price increases.

13. Pricing strategy

A planned approach to pricing within the overall marketing strategy for the target market. Examples of pricing strategies include flexible, static, penetration and value-based pricing, market maintenance, and price skimming.

14. Receivables

An asset designation applicable to all debts, unsettled transactions or other monetary obligations owed to a company by its debtors or customers. Receivables are recorded by a company’s accountants and reported on the balance sheet, and they include all debts owed to the company, even if the debts are not currently due.

15. Retention/holdback

A contractual condition in which money is withheld until a specified time frame passes that ensures the products received are satisfactory.

16. Surety company

A financial entity, typically an insurance company, which assumes the risk of a surety bond project owner (obligee) by guaranteeing payment on the bond or performance of an underlying contract, in the event of a default or a failure of the contractor (principal) to perform its contracted services.

17. Uniform Customs and Practice (UCP)

A set of quasi-regulatory articles governing all aspects of the use of letters of credit (L/Cs). The UCP is published and updated periodically by the International Chamber of Commerce (ICC) in Paris. While adherence is voluntary, the vast majority of L/Cs are issued explicitly subject to the UCP, and many legal traditions (including the Common Law) have given increasing weight to the UCP in adjudicating disputes involving international commerce conducted on the basis of an L/C.

18. Uniform Rules for Collections (URC)

A set of rules published by the International Chamber of Commerce (ICC) to aid bankers, buyers, and sellers in the collections process. The URC have been prepared to resolve problems that practitioners have experienced in their everyday operations. Provisions of URC are not legal requirements but serve to establish common understanding of the collections terminology and expectations.

19. Warranty

A contractual term that is less essential to a contract than a condition. A warranty may be expressed or implied. If breached, a warranty entitles the other party to claim damages for breach of contract but not to reject the goods or repudiate the contract.

20. Wire transfer

The electronic transfer of funds through the cable and wireless networks that unite the world’s banking system, also called cable transfer or bank wire.

Interested in a broader look at managing your finances as you do business around the world? Then the FITTskills 7th Edition International Trade Finance course is for you! Sign up for the course today to enhance your understanding of payment, risk mitigation, financing, and the flow of goods and services!

About the author

Ewan Roy

Author: Ewan Roy

I'm a Content Marketing Specialist for the Forum for International Trade Training (FITT). My background is in writing and research, and I am passionate about communicating new ideas and telling stories that matter to you.

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