Glossary of Trade Terms

All Risk

The most comprehensive type of transportation insurance, providing protection against all physical loss or damage from external causes.

Assignment of proceeds

An instruction to a bank to pay a portion of proceeds earned under a letter of credit to a third party, usually a supplier.

Back-to-back credit

A transaction in which the existence of one letter of credit serves as collateral/security to support the issuance of a second, though independent, letter of credit (called the counter-credit).

Bank (wire) transfer

An electronic transfer of funds between financial institutions, theoretically on the same day.

Bid (contract) bond

A guarantee that the exporter will take the contract if the bid succeeds or else pay a penalty equal to the amount of the bond.

Cash in advance (advance payment)

Payment from a foreign customer prior to actually receiving the exporter’s product(s).

Confirming house

A company, based in a foreign country, that acts as a foreign buyer’s agent and places confirmed orders with an exporter, guaranteeing payment.

Consignment

Delivery of merchandise to a buyer or distributor, where the latter agrees to sell it and only then pay the Canadian exporter. The seller retains ownership of the goods until they are sold but also carries all of the financial burden and risk.

Discounting receivables

A procedure whereby an exporter sells to an approved foreign buyer, creating a receivable, and then sells the foreign receivable to a bank, at a discount from the value of the invoice or receivable.

Document of title

A document that provides evidence of entitlement to ownership of goods (e.g., carrier’s bill of lading).

Documentary collection

An instrument under which a bank or banks act as collecting agents on behalf of the exporter, effecting payment once the stipulated set of documents have been received. Banks do not verify documents under a Collection, so Collections are less secure than Letters of Credit.

Documentary credit (sight draft)

A draft that, upon presentation to the bank, entitles the export to receive payment immediately.

Documentary credit (term)

A draft that, upon presentation to the bank, entitles the exporter to receive payments over terms of 30, 60, or 90 days, or at some specified future date.

Documentary discrepancy

Occurs when one or more of the terms or conditions stipulated in a Letter of Credit have not been met. In the event of a discrepancy, the importer may either refuse the shipment or waive the discrepancy and proceed with the transaction.

Draft (bill of exchange)

A written, unconditional order for payment from one party (the drawer) to another (the drawee) that directs the drawee to pay an indicated amount to the drawer.

Export finance

The transactional aspects of export funding, covering a series of financing mechanisms that are typically short-term and well-known to bankers and trade financiers.

Export financing house

A company that purchases a Canadian exporter’s foreign receivables on a non-recourse basis upon presentation of proper documentation. It then organizes export arrangements and provides front-end financing to the foreign buyer.

Factoring

A financing technique in which an exporter enters into an agreement with a “factor” or “factoring house” to sell foreign receivables to the factor at a fixed discount rate and usually without recourse to the exporter in the event of non-payment.

Factoring house (factor)

Acompany that buys export receivables at a discount.

Fee withhold at source

A percentage of professional consulting fees (typically between 15-30 percent) withheld by the foreign client and remitted directly to the tax authority if the exporter does not have a local office. The fees may be recovered by filing the appropriate income tax forms; however, the whole process results in payment delays of up to 18 months

Finance for exporting

Funding a new export venture – i.e., what is needed to move from a domestically-focused business model to one that is internationally oriented and export based.

Forfaiting

A form of financing in which medium-term financial obligations (notes) are sold at discount and usually on a non-recourse basis, at a fixed rate of financing.

Letter of credit (L/C)

An instrument issued by a bank on behalf of an importer that guarantees an exporter payment for goods or services through a Canadian bank provided the terms of the letter of credit are met.

Letter of credit (confirmed)

A Canadian bank confirms the validity of a letter of credit issued by a foreign bank on behalf of the foreign importer, guaranteeing payment to the Canadian exporter provided that all terms in the document have been met. An unconfirmed letter of credit does not guarantee payment so, if the foreign bank defaults, the Canadian exporter will not be paid. Canadian exporters should accept only confirmed letters of credit as a form of payment.

Letter of credit (irrevocable)

A financial institution agrees to pay an exporter once all terms and conditions of the transaction are met. No terms or conditions can be modified without consent of all parties.

Letter of credit (revocable)

A letter of credit that may be cancelled or amended unilaterally at the behest of the buyer or the issuing bank. Rarely used and not recommended in support of “arms-length” trade transactions.

Open account

An arrangement in which goods are shipped to the foreign buyer before the Canadian exporter receives payment.

Red clause credits

Letters of Credit (L/C) issued with special provisions or clauses (often printed in red) that allow the beneficiary to secure financial advances based upon the L/C, typically to assist in the production, acquisition, and/or shipment of the goods involved.

Revolving letter of credit (cumulative or non-cumulative)

A revolving letter of credit (L/C) provides for multiple drawings under the L/C for specified amounts over a specified time period. This type of L/C is issued in place of multiple, similar credits to the same beneficiary.

Term of exposure

The length of time over which financing is provided.

Term sheet

A contractual document typically issued by a bank, to outline the terms and conditions of a financing arrangement. Trade banks often issue Terms Sheets for short-term financing backed by export credit/insurance agency cover.

Transferable credit

A letter of credit (L/C) that is partially or fully transferred to one or more third parties referred to as “second beneficiaries.” A transferable L/C is often used in cases where the seller is acting to bring the buyer and producer of a product or service together, or where some component of the final product is produced by a third party.