International Trade Glossary of Terms :
ASWP – Any Safe World Port – It is quite common for sellers to offer delivery to any safe world port of the buyer’s choice.
BG – Bank Guarantee Bank Guarantee – which is a financial instrument issued by a bank on behalf of their customer for the benefit of another party to whom the bank’s customer has a contracted financial obligation. In the event that the bank’s client does not make payment on a contract, the beneficiary of the bank guarantee can draw on the bank guarantee and receive payment.
BG 100% Payable Instrument – This is a type of bank guarantee which meets several conditions. It must be issued or guaranteed by a top 25 world bank, be irrevocable, confirmed, and transferable. It must also cover the entire amount of the contract, and be payable on sight upon presentation of authentic shipping documents.
Bill of Lading (B/L) - A bill of lading is a contract which defines the terms of carriage for a shipment. This contract is set out by the carrier and issued to the exporter (the seller) when the shipment has been received and loaded aboard the vessel. The bill of lading is an essential document, as it proves that cement was indeed shipped, and that a carrier has taken responsibility for ensuring delivery to the buyer. In order to claim payment for the shipment using a letter of credit, the seller will invariably have to present the bill of lading at either the confirming or issuing bank.
BCL – Bank Comfort Letter - A bank comfort letter is a letter issued from the buyer’s bank to the seller. This letter states that the buyer has sufficient funds to cover the cost of the order. A bank comfort letter is one of the first pieces of documentation that a prospective buyer must provide to a seller in order to negotiate a deal. It is does not, however, constitute an agreement to pay the seller anything, nor does it make the bank liable in any fashion.
CIA – Cash In Advance - Which is a type of sale in which the full amount of the purchase price of an order must be paid upfront. This is not standard procedure in the trading industry, and it is not advised that any buyer pays upfront for product that has not yet been shipped.
CIF – Cost Insured Freight - Cost Insured Freight – Cost insured freight is part of the standard deal for commodities traders. This means that the seller bears the cost of both shipping and insuring the product until it reaches the destination port.
Commodities Exchange – This is an association which governs the rules of trading in a jurisdiction. Being familiar with the guidelines of the commodities exchange in the jurisdictions in which you are doing business is always advised.
Confirming Bank – A confirming bank is a bank which agrees to honour a letter of credit issued by another bank.
DC – Draft Contract - A draft contract is an initial contract which is drawn up and sent from the seller to the buyer. The buyer has the opportunity to make amendments and send it back to the seller for consideration. This process continues until both parties are satisfied with the terms of the contract.
FCO – Full Corporate Offer - Is issued by the seller after the preliminary stages of negotiation are complete, such as a letter of intent having been issued by the buyer, and a soft probe having been conducted on their accounts by the seller. A full corporate offer is a document which outlines the conditions of the sale.
FOB – Free On Board - If the terms of a trade are ‘FOB’, then the seller is obligated to have the cement delivered to a port of the buyer’s choosing on board a ship that is also of the buyer’s choosing.
Formal (Final) Contract - When the negotiation stages of the draft contract are complete and both parties are satisfied, then a formal contract is drawn up and signed by both parties.
GOST Certification – GOST is the system of quality certification valid in Russia (this can also be called GOST-R). GOST certification is very important for Russian companies and exporters to Russia, and has the same sense of ISO 9000 certificates for Western societies. GOST is the indicator of quality approved for Russia.
GOST certification is not only committed to the quality management of the business subject, but also carried the products thereof. That is to say, to obtain certificates, test samples are required. These tests are conducted on accredited laboratories GOSSTANDARD. (Russian Governmental Standards Organization) based on these tests, certificates are presented to the company that requested.
ICPO – Irrevocable Corporate Purchase Order - This is a document drawn up by commercial buyers, and contains the quantities of product required, the type of product required and other conditions that the buyer would like the sale to proceed under. Once submitted to the seller, this is deemed to be binding and the corporation is obliged to complete the sale.
ICPO With Banking Coordinates - This is an ICPO which includes the company’s bank details in order for the seller to conduct a soft probe on their accounts in order for the seller to satisfy himself that there are sufficient funds in place to cover the cost of the purchase.
Irrevocable Letter of Credit - An irrevocable letter of credit is a document issued from the buyer’s bank to the seller which guarantees payment upon the presentation of stipulated documentation. As an irrevocable document, it cannot be cancelled, and the buyer’s bank is legally obligated to make payment at such time as the beneficiary fulfils the terms set out in the letter of credit.
Irrevocable Confirmed Letter of Credit – An irrevocable confirmed letter of credit which is confirmed by another bank, normally one in the beneficiary’s jurisdiction. A confirming bank is one which undertakes to make payment on the letter of credit on behalf of the issuing bank at such time as the beneficiary meets the terms and conditions outlined in the letter of credit.
Issuing Bank - The issuing bank is the buyer's bank, issuing bank guarantees and letters of credit on behalf of their client.
LC/LOC – Letter of Credit - Letters of credit are documents issued from the buyer’s bank to the seller which guarantee payment to the beneficiary of the letter of credit (the seller), as long as the terms and conditions set out in the letter of credit are met. This generally means presenting stipulated documentation to a confirming bank within a set time frame.
LOI – Letter Of Intent - A letter of intent is a document issued from the buyer to the seller which indicates that the buyer would like to enter into negotiations with the seller in the hope of purchasing a product. The letter of intent is not legally binding, but it does provide a starting point for negotiations.
Ocean Bill of Lading - Another term for bill of lading, referring to transportation which is undertaken via ship. For further information, refer to ‘Bill of Lading’.
POF – Proof of Funds - Usually proof of funds is obtained by conducting a soft probe on the buyer’s accounts. Proof of funds is normally required by a seller before they will proceed with negotiating a product sale.
PB – Performance Bond - This is a type of bank guarantee which is issued from the seller to the buyer. It guarantees that the seller will meet the terms of the contract and that is 2% of the value of the financial instruments provided by the Buyer.
Prime Bank – Top 25 Worlds bank. These are trusted banks which are preferred (or in most cases even mandatory) in commodity trading.
Revolving Letter of Credit - A revolving letter of credit is a letter of credit which can be drawn upon multiple times. These financial instruments are often put in place when a seller is to make multiple shipments to a buyer, and allows the seller to claim payment for each shipment without the need for a separate letter of credit being issued for every shipment.
RWA – Ready willing and Able – This is a document which is issued by the buyer’s bank. The bank confirms that their client has the sufficient funds in their possession and is willing and able to engage in the contract.
SBLC – Standby Letter of Credit - A standby letter of credit is a letter of credit which acts as an assurance from the buyer’s bank that sufficient funds are in place to cover the entire cost of the shipment. Standby letters of credit are not normally drawn upon. If a seller wishes to have payment guaranteed by the buyer’s bank then a letter of credit is normally used.
Sight LOC – Sight Letter of Credit - This is a letter of credit that is payable on the sighting of both the letter of credit, and necessary documentation as stipulated in the letter of credit.
SWIFT – Society for Worldwide Inter bank Financial Telecommunication - Society for Worldwide Inter Bank Financial Telecommunication – This is a global service which is responsible for facilitating communication between banks. Most payments are made via SWIFT.
SGS Inspection - SOCIÉTÉ GÉNÉRALE DE SURVEILLANCE. Before product leaves the port of sale, an inspection is carried out by SGS, the world’s most respected independent cement inspection company. SGS inspections provide peace of mind for the buyer who can be assured that the product is of a high quality if it is cleared by SGS inspectors.
Soft Probe - Is a confirmation method used by banks to verify funding for a seller from a buyer, conducted by the seller to the buyer's bank. Such a probe is not recorded in the buyer's banking information, and usually nothing but confirmation or lack of confirmation is recorded by the seller.
Code Swift MT799 – The MT-799 is a free format SWIFT message type in which a banking institution confirms that funds are in place to cover a potential trade. This can, on occasion, be used as an irrevocable undertaking, depending on the language used in the MT-799, but is not a promise to pay or any form of bank guarantee in its standard format. The function of the MT-799 is simply to assure the seller that the buyer does have the necessary funds to complete the trade.
The buyer’s bank shall send a proof of funds via SWIFT MT-799 with full bank responsibility and stating that they are ready, willing and able to perform the currency exchange with the seller’s bank, this pre-advise is to engage the transaction and for the first tranche only the MT-799 will be incorporated as part of the contract and the wording to be approved by the seller.
The MT-799 is usually issued before a contract is signed and before a letter of credit or bank guarantee is issued. After the MT-799 has been received by the seller’s bank, it is then normally the responsibility of the seller’s bank to send a POP (proof of product) to the buyer’s bank, at which point the trade continues towards commencement.
The actual payment method commonly used is a documentary letter of credit, which the seller presents to the issuing or confirming bank along with shipping documents. Once the bank confirms the documents, the seller is then paid. An alternative method is to use a bank guarantee in place of a letter of credit. It is normally at the seller’s discretion which method of payment is used.
How Do I Issue A MT799?
Approach your bank, and make an arrangement with them to have an MT799 wired to the seller’s bank. Some banks are reluctant to issue MT799’s, as these make them liable for the full cost of the trade, which can sometimes be in the millions. A bank will normally not issue an MT799 without some form of collateral to secure their own interests, so be prepared to put up a hefty amount of collateral.
Swift MT103 – MT103 is used for Payment only. An MT-103 is a SWIFT document for making payments between banks. MT103 is an improved version of the original MT100 message used to make a single payment and can have a large number of options to describe exactly how the payment should be made.
In the Swift Handbook you will find following:
MT103 Single Customer Credit Transfer
Please read the following statement where a MT103 is used to transfer Funds in payment for goods received.
A SWIFT MT103 is a "Customer Payment" message, and relates to the transfer of funds in payment for goods received. In short, an MT103 is a funds transfer message. We would never agree to transmit an MT103 to any party who is unknown to us, or for the payment of any goods or products that we have not inspected and agreed to purchase. For all practical purposes, the transmission of a SWIFT MT103 is equivalent to wiring funds from one account to another.
An MT103 is a wire transfer or TT. Nothing else.
When you want to wire transfer money to someone for any reason all you have to do is go to your bank, fill out a form, and your bank will debit your account and send a Swift Message (MT103) to the beneficiary's bank (paying bank) who will credit that someone's account.
An MT103 is an irrevocable, unconditional transfer. A bank having sent an MT103 cannot cancel it, and the paying bank has no other responsibility than to credit the beneficiary's account.
SWIFT MT760 – MT760 is a format of a Bank Guarantee. An account with the SWIFT MT760 capability allows bank-to-bank SWIFT electronic verification of the account, and will include a blocked funds provision. This is a written guarantee honoring your commitments to a third party in certain circumstances, in the event that you are unable to meet them. Clearly this is not a payment instrument. In the event of default, the beneficiary can liquidate the said guarantee. The Beneficiary would notify his demand via free format (SWIFT) MT 799 or MT 999. Upon receipt of the written demand, the bank would remit proceeds via SWIFT format MT 103 (replacement of MT 100).
The cost of issuing the Bank Guarantee is quit substantial, because normally the expiry date of the Guarantee is within a year.
1) Nature of SWIFT
A SWIFT MT 760 is a bank-responsible guarantee issued by the sender bank, upon instructions of its account holder, in favour of a particular transaction or counter-party. Since banks never put their own money at risk, the clients funds are "blocked" by the bank, and held by the bank as security (collateral) for the issuance of the SWIFT. The SWIFT MT 760, therefore, is more than just an inter-bank message - it is a full-blown cash-backed negotiable instrument!
The SWIFT MT 760 comes in a variety of shapes and sizes, depending on the precise text employed by the sending bank in the field specifications, particularly Field 77C. When offered a SWIFT MT 760 procedure by a Trade Group, clients should request the complete text of the SWIFT MT 760 message so there can be no "surprises" later on. And don't settle for a watered-down "broker" version of the text; the precise language of the field specifications is of critical importance.
U.S. Banks (and some banks in the Far East) have shown a general unwillingness to issue a SWIFT MT 760. Before you can commit to any proposed transaction, therefore, you will need to first confirm that your bank will take instructions to issue the SWIFT message. And if your bank won't cooperate, you may wish to move your funds out of the bank to a more accommodating financial institution!
Keep in mind that the bank charges for issuance of a SWIFT MT 760 are not insubstantial.
Transferable Letter of Credit - A transferable letter of credit is one, which specifically states that it is transferable. This will only occur if the applicant for the letter of credit (buyer) agrees. In a transferable letter of credit, the rights and obligations of the beneficiary are transferred to another party, usually a manufacturer or wholesaler. Transfer may be either full or partial.
Abusive Draw - Drawing on a standby letter of credit when no violation of the underlying contract has occurred.
Acceptance - Acceptance constitutes an unconditional obligation on the part of the accepting party to pay the draft at maturity. A draft accepted by a bank is called a "banker’s acceptance" whereas one accepted by a company is called a "trade acceptance."
Account Party - Party for whom a letter of credit is opened. "Account party" and "applicant" are the same, but sometimes one party will agree with the issuing bank to make all payments under a letter of credit showing the name of another party (as in the case of affiliated companies). Banks may refer to one of these parties as the applicant and the other as the account party.
Advance Payment - Payment made by the buyer to the seller prior to shipment. It is customary to only pay an agreed percentage of the value of the goods with the remainder paid after shipment.
Advance Payment Bond - Bond, guarantee, or standby letter of credit given by a seller receiving an advance payment (or contract) to the buyer to assure that the funds will be returned if goods are never shipped or the services are not performed.
Advising Bank - Bank that receives a letter of credit from the issuing bank for authentication and delivery to the beneficiary. The advising bank is usually a correspondent of the issuing bank located in the same country as the beneficiary.
Airway Bill - Document signed by an airline to show receipt of goods for air transportation from and to the airports indicated.
Ancillary Guarantee - Type of guarantee where the guarantor joins with one of the parties to the contract and agrees to fulfill that party’s obligations if necessary, effectively co-signing the contract. (Sometimes referred to as a "Bank Guarantee" in foreign countries.) As opposed to an independent or demand guarantee, under an ancillary guarantee the guarantor also acquires rights under the contract and may resort to terms in the contract to dispute claims against the guarantee. Also called a "contract guarantee." It should be noted that banks in the USA are generally prohibited by law from issuing ancillary guarantees, banks in other countries are not. US banks instead issue demand guarantees or standby letters of credit.
Applicant - Party requesting that a letter of credit be opened.
Approval, Documents Sent on - Treatment of letter of credit documents wherein the negotiating bank does not certify that the documents meet the requirements of the L/C, but rather forwards the documents to the issuing bank with a request that it examine the documents, obtain waiver of any discrepancies, and pay, or, in the case of time drafts, accept the drafts, if drawn on them, or authorize acceptance by the paying/drawee bank.
Assignment of Proceeds - Legal mechanism by which the beneficiary of a letter of credit may pledge the proceeds of future drawings to a third party. Assigning proceeds involves giving the letter of credit to a bank, which will hold the L/C until drawn upon, along with irrevocable instructions to the bank to disburse proceeds, when generated, in a specified way, (such as, "pay 50% of each drawing to Acme Corporation.") The bank will acknowledge the assignment to the assignee but has no obligation actually to pay any funds to the assignee unless the L/C is drawn upon by the beneficiary and payment is received from the issuing or confirming bank. An assignment of proceeds is not an assignment or transfer of the letter of credit and the assignee acquires no rights to perform under the L/C in order to generate funds.
Authority to pay - See "cable for authority to pay."
Aval - Guarantee added by a bank to an accepted time draft by endorsing the front of the draft "per aval." The avalizing bank becomes obligated to pay the draft at maturity if the drawee/acceptor fails to do so.
Avalized Draft - Trade acceptance to which an aval has been added.
B/A - Abbreviation for "banker’s acceptance."
B/L - Abbreviation for "bill of lading."
Banker’s acceptance - Time draft that has been drawn on and accepted by a bank. In a large and active market, investors buy and sell bankers’ acceptances at rates similar to, and often below, LIBOR. Rates are low due to the low risk of
default on the part of a bank and the fact that there is generally an underlying trade transaction, the proceeds of which are pledged to cover the acceptance when it matures.
Beneficiary - Party in whose favor a letter of credit is issued, who is entitled to present documents required by the L/C and receive payment.
Bid Bond - Bond, guarantee, or standby letter of credit that accompanies a bid, issued for an amount that will be forfeited if the bidder wins the bid but then reneges.
Bill of Exchange - A draft.
Bill of Lading - Document signed by a transportation company (carrier) to show receipt of goods for transportation from and to the points indicated. Although US law recognizes such a thing as a non-negotiable bill of lading, international law distinguishes bills of lading from waybills in that a bill of lading is a title document issued to order of a "consignee," who can then transfer title (legal ownership of the goods) by endorsement and delivery ("negotiation") of the bill of lading.
Someone must present the bill of lading at the point of delivery in order to claim the goods. A waybill is not negotiable in this way and the transportation company will simply deliver the goods to the consignee. A transport document issued "consigned to order of..." is a negotiable bill of lading; one issued simply "consigned to..." is a nonnegotiable waybill. See also "multimodal bill of lading,""ocean bill of lading," "port-to-port bill of lading."
Bond - See specific types: "advance payment bond," "bid bond," "performance bond."
C&F - Abbreviation for "cost and freight (...named port of destination)." Also CFR.
CAD - Abbreviation for "cash against documents."
CFR - Abbreviation for "cost and freight (Named port of destination)." Also C&F.
CIF - Abbreviation for "cost, insurance, and freight (Named port of destination)."
CIP - Abbreviation for "carriage and insurance paid to (Named place of destination)."
CPT - Abbreviation for "carriage paid to (Named place of destination)."
Cable for Authority to Pay - Request for permission to pay a letter of credit drawing despite discrepancies, sent electronically by the negotiating bank to the issuing bank.
Carriage and Insurance Paid to (Named place of destination) - Shipping term included in a contract of sale (abbreviated as CIP) meaning that the seller agrees to arrange and pay for transportation and cargo insurance over the goods to the named destination, such costs being included in the price of the goods. Nonetheless, all risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time the goods have been delivered to the carrier, is transferred from the seller to the buyer when the goods have been delivered into the custody of the carrier.
Carriage Paid to (Named place of destination) - Shipping term included in a contract of sale (abbreviated as CPT) meaning that the seller agrees to arrange and pay for transportation of the goods to the named destination, such costs being included in the price of the goods. Nonetheless, all risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time the goods have been delivered to the carrier, is transferred from the seller to the
buyer when the goods have been delivered into the custody of the carrier, at which point the buyer must arrange for cargo insurance if so desired.
Carrier - Any person who, in a contract of transportation, undertakes to perform, or to procure at his own responsibility the performance of, transportation by rail, road, sea, air, inland waterway or by a combination of such modes. See "multimodal bill of lading" for further discussion.
Case-of-Need - An agent of the exporter located in the country of the importer who is to be notified by the presenting bank under a draft collection of any difficulties in collecting payment. The case-of-need may be given the power to change the collection instructions or even the draft amount, or may just be expected to make arrangements to store the goods and locate an alternate buyer. Whatever authority the case-of-need has should be specified in the collection instructions letter.
Cash Against Documents - Term (abbreviated as CAD) for documentary collection instructions requesting the presenting bank to deliver documents only upon receipt of payment from the drawee/importer. (The same as, "documents against payment.")
Certificate of Origin - Document that is required in certain countries. It is a signed statement as to the origin of the export item. Certificates of origin are usually signed through an official organization, such as a local chamber of commerce, or can simply be a statement signed by the manufacturer or exporter as to the source of the goods.
Clean Bill of Lading - Bill of lading that bears no clause or notation which expressly declares a defective condition of the goods and/or the packaging.
Clean Draft - Draft which is not accompanied by documents.
Clean letter of credit - Letter of credit that calls for presentation of nothing more than a draft to trigger payment. This term is sometimes used incorrectly to mean "standby letter of credit with all documents presented correctly".
Collecting Bank - Any bank other than the remitting bank involved in the collection of a draft and/or documents.
Combined transport - See "multimodal bill of lading."
Commercial Invoice - A bill for the goods from the seller to the buyer. These invoices may be used by governments to determine the true value of goods when assessing customs duties.
Commercial Letter of Credit - Letter of credit intended to act as the vehicle of payment for goods sold by one party to another.
Commercial Risk - Risk that the buyer of goods cannot or will not pay the seller when payment is due.
Confirmed Letter of Credit - Letter of credit to which the advising bank has added its own, independent undertaking to honor presentation of the required documents, i.e., pay the beneficiary at sight or at maturity, as specified by the L/C. See also "silent confirmation."
Confirming Bank - Bank that has added its confirmation to a letter of credit. This term is also sometimes used loosely to refer to a bank that has issued a commitment to purchase letter of credit documents without recourse, a practice called "silent confirmation."
Consignee - Party into whose possession goods are to be delivered.
Consignment - Term of sale wherein a seller delivers goods to the buyer but retains legal ownership of the goods until they are re-sold by the buyer. The buyer is responsible for remitting payment to the seller at time of re-sale.
Consular Invoice - A document that is required in some countries. It describes the shipment of goods and shows information such as the buyer and seller, and value of the shipment. Certified by the consular official of the foreign country stationed in the USA, it is used by the country's customs officials to verify the value, quantity, and nature of the shipment.
Contract Guarantee - See "ancillary guarantee."
Contract Risk - Risk that the buyer of goods will renege on the contract (as opposed to simply being unable to pay).
Cost and Freight (Named port of destination) - Shipping term included in a contract of sale (abbreviated as CFR or C&F) meaning that the seller agrees to take full responsibility for delivering the goods to the port of loading, clear the goods for export, and arrange and pay for transportation of the goods to the named port of discharge, such costs being included in the price of the goods. Nonetheless, all risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time the goods have been delivered on board the vessel, is transferred from the seller to the buyer when the goods pass the ship’s rail at the port of loading. It is up to the buyer to arrange marine insurance for the ocean voyage and transportation from the port of discharge.
Cost, Insurance and Freight (Named port of destination) - Shipping term included in a contract of sale (abbreviated as CIF) meaning that the seller agrees to take full responsibility for delivering the goods to the port of loading, clear the goods for export, and arrange and pay for transportation and marine insurance over the goods to the named port of discharge, such costs being included in the price of the goods. Nonetheless, all risk of loss or damage to the goods, as well as any additional costs due to events occurring after the time the goods have been delivered on board the vessel, is transferred from the seller to the buyer when the goods pass the ship’s rail at the port of loading. It is up to the buyer to arrange transportation from the port of discharge.
Country Risk - Risk incurred by a seller of goods that a buyer in a different country will not be able to pay for the goods due to political or economic conditions in his country. The two components of country risk are "political risk" and "transfer risk."
Credit Insurance - Insurance against losses due to inability or failure of customers to pay. There is usually a high deductible amount involved before the insurance will pay.
Credit Risk - Risk incurred by a seller of goods that the buyer cannot or will not pay for them. See also "commercial risk," "contract risk," "financing risk,""political risk," "transfer risk."
Cumulative Revolving Letter of Credit - Revolving letter of credit that permits the seller to carry over any amounts not drawn into successive periods.
D/A - Abbreviation for "documents against acceptance."
D/P - Abbreviation for "documents against payment."
Days of Grace -The number of days the acceptor of a draft may go past due before being judged in default and triggering any guarantor to pay on the acceptor’ s behalf. When an avalized draft is sold to a forfaiter, the forfaiter will impute the days of grace into the financing period.
Deferred Payment - Payment a set time after shipment or presentation of shipping documents, as opposed to immediately or "at sight." A distinction is drawn between a letter of credit that is available for deferred payment and one that is available for acceptance of time drafts in that no drafts are involved under a deferred payment L/C. Without accepted drafts, the beneficiary’s ability to sell, or "discount," his right to payment to another lender or investor is restricted.
Deferred Reimbursement - Arrangement under a letter of credit where the issuing bank agrees up front with its customer, the applicant, to pay the beneficiary upon presentation of the documents required in the L/C but to defer
charging the applicant until a later date, thereby financing the purchase of goods under the L/C, usually for the expected amount of time the applicant needs in order to re-sell the goods.
Demand Guarantee - Type of guarantee that is payable immediately upon presentation of documents specified, without regard to the validity of the documents or compliance with the underlying contract, as opposed to an "ancillary guarantee." Also called an "independent guarantee." Although there are separate rules of practice for demand guarantees and letters of credit, they are both considered letters of credit under US law.
Destination Control Statement - This item appears on the commercial invoice, and ocean or air waybill of lading to notify the carrier and all parties that the item can be exported only to certain destinations.
Direct Collection - Service for handling export draft collections in which the exporter’s bank provides the forms that bear the bank’s own letterhead for mailing documents to the buyer’s bank for collection. To the buyer’s bank, it will appear that the documents were sent from the exporter’s bank, but time and expense can be saved by bypassing unnecessary processing at the exporter’s bank.
Discrepancies - Term used to describe deviations between documents presented and requirements set in the letter of credit or inconsistencies among the documents themselves.
Dishonor - Failure or refusal by the drawee/payer to accept a draft presented for acceptance or to pay a draft presented for payment.
Documentary Credit - Synonymous with "letter of credit."
Documentary Draft Collection - Process for collecting payment in a sale of goods wherein a legal demand for payment from the buyer is made by a bank acting as collecting agent for the seller. Demand is made by presenting a draft. The collecting bank is also entrusted with documents to deliver in accordance with accompanying instructions, usually once the draft is either paid or accepted. These documents are generally needed by the buyer to show title to the goods before they will be released by a freight forwarder and customs.
Documentary Letter of Credit - Another way to refer to commercial letters of credit.
Documents Against Acceptance - Term for documentary draft collection instructions requesting the presenting bank to deliver documents only upon acceptance of the draft by the drawee/importer. See also "acceptance."
Documents Against Payment - Term for documentary collection instructions requesting the presenting bank to deliver documents only upon receipt of payment from the drawee/importer. Synonymous with "cash against documents."
Draft - Written demand for payment of a specified amount addressed to a named party, called the "drawee," and signed by the "drawer." A draft may demand payment immediately upon presentation ("at sight") or on a specified maturity date and must also specify a party to be paid (the "payee"). Most drafts are "negotiable," meaning the payee’s right to payment can be transferred by the payee to another party by endorsement and delivery of the draft.
Draft Collection - Process for collecting payment in a sale of goods wherein a legal demand for payment from the buyer is made by a bank acting as collecting agent for the seller. Demand is made by presenting a draft. See also "draft" and "documentary draft collection."
Drawee - Party to whom a draft is addressed and from whom payment is demanded, or, in a documentary collection with no draft, party from whom payment is requested in exchange for delivery of documents.
EMC - Abbreviation for "export management consultant."
ETC - Abbreviation for "export trading company."
EXW - Abbreviation for "ex works (Named place)."
Evergreen Letter of Credit - Letter of credit with an initial expiration date but containing a clause that states that it will be automatically extended for additional periods unless the issuing bank provides notice to the beneficiary stating otherwise.
Ex Factory - Synonymous with "ex works."
Ex Works (Named place) - Shipping term included in a contract of sale (abbreviated as EXW) meaning 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 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.
Expiry Date - Last date on which documents may be presented or corrected in order to comply with a letter of credit. Presentation must be made to the bank indicated in the L/C.
Export Letter of Credit - Term used by an exporter to describe a commercial letter of credit in his favor or by a bank to describe a letter of credit issued by a bank other than itself. The same L/C will be called an "import letter of credit" by the importer/butyer and the issuing bank.
FCA - Abbreviation for "free carrier (Named place)."
FCR - Abbreviation for "forwarder’s cargo receipt."
FOB - Abbreviation for "free on board (Named port of shipment)."
Factoring - Service of assuming the credit risk of another party’s sales, generally including collecting payment when due. Factors often provide or arrange limited- recourse financing against the accounts receivable they are guaranteeing, referred to as "purchasing receivables."
Fed Funds Rate - Interest rate at which banks in the United States lend each other dollars for next-day repayment ("overnight loans").
Financing Risk - Term used to describe the increasing uncertainty that the buyer of goods will have the capacity to pay when payment is due the longer the time period he is given to make payment.
Forfait - Purchase of negotiable instruments, most often avalized drafts, without recourse. The forfaiter assumes the credit risk of being able to collect payment when due.
Forwarder’s Cargo Receipt - Document issued by a freight forwarder or freight consolidator indicating goods have been received from the seller and are being held on behalf of the buyer. Goods are generally received in the seller’s country and the forwarder/consolidator will arrange shipment to the buyer according to the buyer’s instructions.
Free Carrier (Named place) - Shipping term included in a contract of sale (abbreviated as FCA) meaning that the seller fulfills his obligation to deliver when he has handed over the goods, cleared for export, into the charge of the carrier, freight consolidator, or freight forwarder named by the buyer at the named place or point.
Free on Board (Named port of shipment) - Shipping term included in a contract of sale (abbreviated as FOB) meaning that the seller fulfills his obligation to deliver when the goods have passed over the ship’s rail at the named port of shipment, all costs of inland transportation and loading being included in the price of the goods. The buyer has to bear all costs and risks of loss of or damage to the goods from that point.
Freely Negotiable Letter of Credit - Letter of credit that indicates it is "available with any bank by negotiation." By including this wording, the issuing bank authorizes the beneficiary to present documents to the bank of his choice for examination and collection of payment.
Freight Forwarder - Company that, as an agent for the shipper, arranges transportation for goods. Many freight forwarders offer additional services such as preparing export documentation, arranging for goods to be packed into shipping containers, arranging for goods to clear customs, etc.
Full Set - All signed originals of a document. For example, bills of lading are often issued in three originals, all having the same validity for claiming goods at the place of delivery.
Grace Period - See "days of grace."
Import Letter of Credit - Term used by an importer to describe a commercial letter of credit he has asked a bank to issue or by a bank to describe a letter of credit it has issued. The same L/C will be called an "export letter of credit" by the exporter.
Independent Guarantee - See "demand guarantee."
Inspection Certificate - A document that is required by some purchasers and countries in order to attest to the specifications of the goods shipped. This is usually performed by an independent third party that will inspect the goods for conformity.
Installment Letter of Credit - Letter of credit calling for multiple shipments within specified date ranges.
Insurance - see "credit insurance" and "marine cargo insurance."
Irrevocable Letter of Credit - Letter of credit that cannot be amended or canceled without agreement of both the beneficiary and the issuing bank. Any letter of credit subject to the UCP500 or to US law is irrevocable unless it specifies otherwise.
Issuing Bank - Bank that has issued a letter of credit. The issuing bank is obligated to pay if documents are presented that comply with the L/C requirements.
Letter of Credit - A letter on the part of a bank and at the request of one of the bank’s customers, to pay a named beneficiary a specified amount of money (or to deliver an item of value) if the beneficiary presents documents in accordance with the terms and conditions specified in the letter of credit.
Letter of Guarantee - Undertaking, usually on the part of a bank, either to fulfill the obligations of another party (see "ancillary guarantee") or to pay a specified amount of money upon presentation of specified documents stating that the party being guaranteed has defaulted on certain obligations (see "demand guarantee"). One must be careful to discern which type of guarantee one is dealing with as they both require presentation of documents but work very differently thereafter. US law forbids banks from making guarantees, so they use letters of credit to accomplish the same goal.
LIBOR - Acronym for the London Interbank Offered Rate. The interest rate at which banks in London place Eurocurrency/Eurodollar deposits with each other for specified, fixed periods of time, most commonly six months.
Marine Cargo Insurance - Insurance covering loss of or damage to goods in the course of international transportation. The term is used for both air and land transportation as well as ocean transportation.
Marine Bill of Lading - Synonymous with "ocean bill of lading."
Multimodal Bill of Lading - Bill of lading covering shipment of goods by more than one means of transportation but including an ocean leg. The two major forms of multimodal bill of lading are the combined transport bill of lading and the through bill of lading. In a "combined transport bill of lading", the carrier signing the bill of lading (the "contractual carrier") frequently subcontracts the various legs to other carriers (the "actual carriers"), but still takes responsibility for delivery of the goods to the "place of delivery" and for any damage that might occur during carriage. In a "through bill of lading", the carrier takes responsibility for the goods only up to a specified point (still called the "place of delivery") and then passes responsibility to a second carrier for "on-carriage" to the "final destination."
Multimodal Transport - Shipment of goods by more than one means of transportation but including an ocean leg (see "multimodal bill of lading").
Negotiable - Quality belonging to a document that enables it to transfer the ownership of money, goods, or other items of value specified in the document by endorsement and/or delivery of the document. Checks, drafts, promissory notes, bonds, stock certificates, bills of lading, and warehouse receipts are examples of documents often issued in negotiable form.
Negotiate - To "buy" documents representing ownership of money, goods, or other items of value. The seller is also said to "negotiate to" the buyer. Unless otherwise agreed between the buyer and seller (such as, by negotiating "without recourse"), the seller continues to be fully responsible for the enforceability of the documents. For example, a bank that negotiates documents under a letter of credit advances funds to the presenter before submitting the documents to the issuing bank for payment.
Negotiating Bank - Bank to which letter of credit documents are presented by the beneficiary for collection of payment. The name derives from the fact that the negotiating bank is normally authorized by the issuing bank to negotiate documents (see "negotiate"), but it may or may not choose actually to do so. Furthermore, realizing that this bank may be authorized to pay or accept drafts, rather than negotiate them, UCP500 now uses the term "nominated bank" rather than "negotiating bank." Unless otherwise instructed, negotiating banks in North America generally examine the documents for discrepancies before forwarding them to the issuing bank, but this is properly viewed as a service separate from negotiating and is not necessary when negotiating with recourse.
Non-Cumulative Revolving Letter of Credit - Revolving letter of credit that does not permit the seller to carry over any amounts not drawn upon in previous periods.
Notify Party - Party to be notified by the carrier of arrival of the goods at their destination. Normally the notify party is the importer and/or the importer’s agent for clearing goods through customs.
Ocean Bill of Lading - Bill of lading including shipment on an ocean vessel, also called a "marine bill of lading".
Performance Bond - Bond issued at the request of one party to a contract in favor of the other party to the contract to protect the other party against loss in the event of default on the contract by the requesting party. The bonding agent may undertake to fulfill the contract or may simply undertake to pay a specific amount in monetary damages. A standby letter of credit or demand guarantee is often used as a performance bond with the latter characteristics.
Political Risk - Risk in a sale of goods that the government in the buyer’s country may take some action that prevents the buyer from paying. This covers possibilities such as foreign exchange controls and nonpayment due to war or insurrection.
Port-to-Port Bill of Lading - Bill of lading covering shipment by ocean only. The shipper/seller is responsible for transporting the goods to the port of loading and the buyer is responsible for picking the goods up at the port of discharge. Multimodal, rather than port-to-port, bills of lading should generally be used for containerized shipments and other shipments where the place of receipt and/or the place of delivery is inland.
Pre-Export Financing - Specific form of working capital lending in which the borrower is given funds needed to obtain or manufacture goods that have been ordered by a buyer in another country. As such financing is normally earmarked to individual sales, documentation of each sale must be provided to the lender, often in the form of a letter of credit with proceeds assigned to the lender.
Presenting Bank - In a draft collection transaction, the bank that contacts the drawee/buyer of goods, for acceptance and/or payment.
Principal - Party entrusting a draft and/or documents to a bank for collection of payment; usually the seller of goods.
Progress Payment - One in a series of payments made at stages in the performance of a contract. Examples would be payments made during the various stages of construction.
Protest - In a draft collection transaction, the formal legal process of registering that payment or acceptance of the draft has been demanded but the drawee has refused to pay or accept the draft.
Reimbursing Bank - In a letter of credit transaction, the bank with which the issuing bank maintains an account and which is authorized by the issuing bank to charge that account to pay claims received from the negotiating bank for documents that have been presented.
Remitting Bank - In a draft collection transaction, the first bank in the chain of collection; the principal’s or seller’s bank.
Retention of Title - Legal arrangement under which a seller of goods delivers these goods "on consignment" into someone’s custody but ownership remains with the seller until he is paid. Retention of title allows the seller to repossess the goods whenever desired and to establish a claim against the custodian if the goods are sold or used without being paid for.
Revocable Letter of Credit - Letter of credit that can be amended or canceled at any time without notice to or consent of the beneficiary. A letter of credit that is subject to the UCP500 or to US law is revocable only if it clearly states this on the L/C.
Revolving Letter of Credit - Letter of credit that reverts to its original amount at specified intervals, thereby preventing drawing too much in any one period. See also "cumulative revolving letter of credit" and "non-cumulative revolving letter of credit."
Shipper's Export Declaration - The SED is used to control exports and act as a source document for official US export statistics. SEDs must be prepared for shipments through the U.S. Postal Service when the shipment is valued over $500. SEDs are required for shipments not using other carriers, when the value of the commodities, classified under any single Schedule B number, is over $2,500. SEDs must be prepared, regardless of value, for all shipments requiring an export license or destined for countries restricted by the Export Administration Regulations. SEDs are prepared by the exporter or the exporter's agent and delivered to the exporting carrier (the post office, airline, or maritime company ). The exporting carrier will present the required number of SED copies to the US Customs Service at the port of export.
Shipper’s Indemnity - Indemnity given by the beneficiary of a letter of credit to the negotiating bank to induce payment despite any discrepancies that may exist in the documents.
Shipping Terms - That part of a contract between a buyer and seller that specifies who is responsible for each aspect of shipping the good; this may include responsibility for packing, arranging and paying for transportation and insurance, clearing customs, and so forth.
Sight - Time of presentation, as in a draft payable "at sight" or "90 days after sight."
Sight Draft - Draft that demands payment "at sight," or immediately, as opposed to a time draft, which may be payable "90 days after sight" or "30 days after bill of lading date."
Silent Confirmation - Term used for a bank’s commitment to negotiate documents under a letter of credit without recourse at a future date. A silent confirmation is not a confirmation in the true sense, and will not use the word "confirm," but is rather an equivalent form of protection for the beneficiary. The bank will require that the letter of credit be negotiable or payable by itself in order
to be able to establish holder-in-due-course rights equivalent to those of a confirming bank.
Standby Letter of Credit - As opposed to a commercial letter of credit, a letter of credit that does not cover the direct purchase of merchandise, so called because it is often intended to be drawn on only when the applicant for whom it is issued fails to perform an obligation. There is, nonetheless, a type of standby letter of credit that is intended to be drawn on, referred to as a "direct pay letter of credit." Standby letters of credit are based on the understanding that payment is made against presentation of documents - usually a statement from the seller indicating that the buyer has not paid for merchandise/invoices on the due date.
Supplier Financing - Arrangement where the seller/supplier of goods allows the buyer an extended period of time after shipment to pay for the goods. Basically, open credit terms.
Tenor - Time at which a draft indicates it is payable, such as, "at sight," "60 days after the bill of lading date."
Time Draft - Draft that demands payment at a specified future date rather than immediately upon presentation.
Trade Terms - Same as "shipping terms."
Transferable Letter of Credit - Type of letter of credit that names a middleman as beneficiary and allows him to give another party, the actual supplier, certain rights to present documents and receive payment under the letter of credit. Transfer must be effected by a bank authorized to do so by the issuing bank and involves notifying the transferee (called the "second beneficiary") of what
documents he must present. The documents must be the same as those required in the letter of credit itself but the price of the goods may be reduced and the middleman’s name may be required to be listed in the transferee’s invoices as the buyer, thereby allowing the middleman to substitute invoices at a higher price and receive the difference without disclosing the name of the actual end-buyer. The transferring bank is not obligated to pay documents presented under the transfer - such obligation remains with the issuing bank.
UCC - Abbreviation for "Uniform Commercial Code."
UCP - Abbreviation for "Uniform Customs and Practice for Documentary Credits." The 1993 revision is referred to as "UCP500" as it is publication number 500 of the International Chamber of Commerce.
Unconfirmed Letter of Credit - Letter of credit that has not been confirmed (see "confirmed letter of credit").
Uniform Commercial Code - United States statute covering the rights and obligations of the various parties involved in the purchase and sale of goods. The UCC includes coverage of drafts and other negotiable instruments, documents of title, transfers of funds between banks, and security interests in assets as well as draft collections (in Article 4) and letters of credit (in Article 5).
Uniform Customs and Practice for Documentary Credits - International standards of letter of credit practice established for bankers by the International Chamber of Commerce. The UCP is constantly being revised to keep up with changing practices. Although the UCP defines rights and obligations of the various parties in a letter of credit transaction, it is not law and any given letter of credit is subject to the UCP only to the extent indicated in the letter of credit itself.
Uniform Rules for Collections - International standards of draft collection practice established for bankers by the International Chamber of Commerce. The Uniform Rules are not law but are more properly viewed as a handbook for banks used to establish common understanding of terminology and expectations.
Without Recourse - Negotiation of a draft, or other negotiable instrument, or letter of credit documents without the normal warranty on the part of the seller of the instrument/documents that the payer named in the instrument (the "drawee," "payer," or "maker") will pay. Although the seller is still responsible for the genuineness of the instrument and documents, the purchaser takes on the credit risk of being able to collect payment from the payer when due. Unless negotiation
is without recourse, the purchaser of the instrument/documents has the right to recover the face amount from the seller if the payer/drawee fails or refuses to pay for any reason.
Why 14 or 16 months in the payment instruments? - The result of 14 months and 15 days is because if a 12 month contract, a payment instrument is issued today, the product will not ship to a maximum of 45 additional days - so that allowed 13 months to 12 months of shipments - so an allowance of 13 or 14 months is always made for shipments to unforeseen delays or because the buyer can not unload the ship and so on.