Trade Finance and Payment Terms
Expert-defined terms from the Professional Certificate in Global Logistics and Trade Compliance: course at London School of Business and Administration. Free to read, free to share, paired with a globally recognised certification pathway.
Trade Finance #
Trade finance refers to the financial instruments and products that facilitate i… #
It involves various financial activities such as issuing letters of credit, trade credit insurance, factoring, and export financing. Trade finance helps businesses manage cash flow, reduce payment risks, and improve their ability to compete in the global market.
Payment Terms #
Payment terms are the conditions agreed upon between the buyer and seller regard… #
These terms outline when and how the payment will be made, including the currency, payment method, and any applicable fees or discounts. Payment terms play a crucial role in trade transactions as they impact cash flow, risk management, and relationships between trading partners.
Acceptance Draft #
An acceptance draft is a payment instrument used in trade finance transactions w… #
The buyer signs the draft to acknowledge their obligation to make the payment on the agreed-upon date. Acceptance drafts are commonly used in international trade to provide sellers with assurance of payment.
Bill of Exchange #
A bill of exchange is a written order from the exporter (drawer) to the importer… #
Bills of exchange are commonly used in international trade to facilitate payment and guarantee the seller's right to receive payment for goods or services.
Consignment #
Consignment is a trade arrangement where the exporter (consignor) ships goods to… #
The consignee receives a commission for selling the goods and remits the proceeds to the consignor after deducting expenses. Consignment is a common method of international trade, especially for goods with uncertain demand or high value.
Documentary Collection #
Documentary collection is a trade finance method where the exporter ships goods… #
The bank forwards the documents to the importer's bank, which releases the documents to the importer upon payment or acceptance of a bill of exchange. Documentary collection is a cost-effective payment method that provides some security for both parties.
Export Credit Insurance #
Export credit insurance is a type of insurance that protects exporters against n… #
It covers risks such as insolvency, default, political unrest, or currency fluctuations that may prevent the buyer from fulfilling their payment obligations. Export credit insurance enables exporters to expand into new markets and mitigate the risks associated with international trade.
Factoring #
Factoring is a financial service where a company (factor) purchases accounts rec… #
The factor assumes the credit risk and responsibility for collecting payment from the debtor. Factoring is commonly used in international trade to improve cash flow and reduce the risk of non-payment.
Irrevocable Letter of Credit #
An irrevocable letter of credit is a payment guarantee issued by a bank on behal… #
It assures the seller that they will receive payment as long as they fulfill the terms and conditions of the letter of credit. An irrevocable letter of credit cannot be amended or canceled without the consent of all parties involved, providing security for both the buyer and seller.
Open Account #
An open account is a payment arrangement where the exporter ships goods to the i… #
The importer agrees to pay the exporter at a later date, typically within a specified credit period. Open account terms are common in international trade but carry a higher risk for the exporter as they rely on the importer's creditworthiness.
Prepayment #
Prepayment is a payment made by the buyer to the seller before the goods are shi… #
It provides the seller with immediate cash flow and reduces the risk of non-payment. Prepayment terms are often used in international trade for custom-made or high-value goods where the seller requires payment upfront to cover production costs.
Revolving Letter of Credit #
A revolving letter of credit is a type of letter of credit that can be used mult… #
It allows the buyer to make multiple drawdowns up to a predetermined credit limit without the need to issue a new letter of credit for each transaction. Revolving letters of credit are beneficial for ongoing trade relationships with frequent transactions.
Standby Letter of Credit #
A standby letter of credit is a guarantee issued by a bank on behalf of a buyer… #
It serves as a backup payment method when the buyer fails to fulfill their payment obligations. Standby letters of credit are often used in international trade to provide assurance to the seller and mitigate credit risk.
Time Draft #
A time draft is a type of bill of exchange that specifies a future payment date,… #
The seller can present the time draft to the buyer for acceptance, indicating when the payment is due. Time drafts are used in international trade to establish a payment schedule and provide certainty for both parties.
Uniform Customs and Practice for Documentary Credits (UCP) #
The Uniform Customs and Practice for Documentary Credits (UCP) is a set of rules… #
The UCP defines the rights and obligations of the parties involved in a letter of credit transaction, standardizing practices to ensure smooth and efficient trade finance operations worldwide.
With Recourse #
With recourse is a term used in trade finance to indicate that the seller retain… #
If the drawee fails to pay the bill of exchange or accept the draft, the seller can seek recourse against the buyer for the outstanding amount. With recourse terms provide the seller with additional protection in case of default.