Glossary

Aval. A generally recognized and widely used form of guarantee of payment, given normally by a bank. An aval normally takes the form of an endorsement "per aval" from the bank, with the appropriate signature, on the back of a bill of exchange or promissory note (which improves the security from the buyer to the bank). This then puts the bank broadly into the position of an opening bank under a letter of credit. The legal enforceability of an aval may vary from country to country but should always be checked in advance. Such bills and notes are widely used in connection with forfait transactions.

Avaliser, avalising bank. A bank that issues an aval.

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).

Banker's acceptance. A document under which a bank agrees to make payment to the bearer at a specified future date. These acceptances can usually be sold on the market, at a discount that depends both on when the payment is due and on the reputation and location of the bank. Banker's acceptances are widely used in short-term business.

Bid bond. A bond or guarantee, normally issued by a bank on behalf of an exporter in favor of a buyer that provides that if an exporter submits a bid or tender and is awarded the contract, but then fails to conform or to comply with the terms of its tender, the bond may be called. A bid bond gives the buyer some financial assurance that bidders will comply with the terms of their bids. In theory, the calling of the bond should compensate the buyer for the costs of the aborted tender and of retendering and reawarding the contract.

Bill of exchange. An unconditional order in writing from one party to another requiring the latter, if it accepts the order, to make payment on demand on the due payment date. Thus, in export transactions, a bill of exchange is drawn up by the exporter and accepted by the importer, who then is responsible for paying on presentation of the bill at the appropriate time. When the bill bears no date, it is normally referred to as a sight bill. Where credit is involved, bills are variously referred to as time bills, tenor bills, or usance bills. Once accepted, bills can be sold or discounted. Bills accepted by companies with a high credit rating or that have the aval of a bank are often used in forfait transactions.

Bill of lading. A very important document in international trade that provides evidence of receipt of goods by the shipper, gives details of the conditions of transport, and, importantly, normally conveys title to the goods. When presented to the shipper, for example after being released by a bank, a bill of lading is usually sufficient to obtain the release of the goods.

Buyer credit. An arrangement in which an exporter enters into a contract with a buyer, which is financed by means of a loan agreement between a bank in the exporter's country and a bank in the buyer's country. Such arrangements are most frequently used to finance capital goods or projects on a medium- or long-term basis. The export credit agency in the exporting country typically provides its facilities to the lending bank. The exporter can draw on the loan as the work is done and accepted (these disbursements are called loan drawings or progress payments). Interest on the loan is payable during the drawdown period, but repayments on principal do not normally begin until the project is completed and the loan fully drawn.

Cash with order (CWO). An arrangement whereby a buyer or importer makes payment when an order is confirmed, and so, normally, before the seller or exporter begins work and incurs costs. Although obviously attractive and secure from the exporter's point of view, by the same token CWO arrangements leave the importer exposed to a range of risks.

Collecting bank. A name sometimes applied to the advising bank in letter of credit transactions.

Commercial Account Manager, or Commercial Banker: The services of a commercial account manager usually come into range when a business has regular borrowing requirements of more than $250,000. If so, commercial bankers from any bank in Canada can set-up even more diverse and flexible forms of business financing. Specifically, their ability to offer a greater range of services and to be able to analyze the full scope of your business can often result in more support. Importantly, a commercial banker, while still asking for some form of personal credit involvement from a business’ owners (such as personal guarantees), will be able extend more credit based on the value and nature of assets in the business. Commercial bankers are usually able to “margin receivables” which means that they base their calculations for the amount of working capital a business will qualify for on the nature and strength of a business’ receivables and other tangible assets. Commercial bankers are often more likely to be able to partner with a public sector institution and leverage that support to deliver even more value to their customers.

Commercial risk. One of the two main categories of risk covered by credit insurers (the other being political risk). The term applies primarily to the risk of nonpayment by a private buyer or commercial bank or a public buyer due to default (protracted or otherwise), insolvency or bankruptcy, or failure or unwillingness to take delivery of the goods (i.e. repudiation).

Credit insurance. Credit insurance protects the insured party (normally the seller), in exchange for a premium, against a range of risks that result in nonpayment by the buyer. In export credit cover, both commercial and political risks are normally involved.

Credit period. The period from the time of delivery or acceptance of goods (for short-term business) or from the commissioning of the project (in project financing) until repayment is complete. Maximum credit periods are set for repayment periods.

Credit terms. The terms or main features relating to the repayment of credit, including the length of credit, the repayment profile, the interest rate, the amount of any down payment, and so on.

Debt collector (Collection Agency). A person or agency, normally residing in the country of the debtor that pursues debtors and seeks recovery of the funds they owe.

Default. The failure of a buyer or borrower (or its guarantor) to make contractually due payments, whether of principal or of interest. The term can also refer to a situation where a contractor or exporter is in breach of a contract.

Direct payment. Payment made directly to an exporter by an importer or by a bank that is not the subject of a buyer credit loan. Direct payments usually arise in a buyer credit context. They can include down payments or payments for local costs or foreign goods.

Disbursement. A drawing made by an exporter on a loan that is the subject of a buyer credit. Most projects or capital goods contracts of any size provide for exporters to receive payments while their work is in progress (these are called progress payments), that is, before construction of the project is finished or before the finished capital goods are delivered or accepted. These payments are usually made according to an agreed schedule and on the basis of qualifying certificates of some kind, showing that the work has been completed satisfactorily. The arrangements are designed, therefore, to protect both exporters and importers as well as lenders and borrowers.

Discounting Receivables. Procedure whereby an exporter sells to an approved foreign buyer, creating a receivable, then sells the foreign receivable to a bank, at a discount to the value of the invoice or receivable.

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 discrepancy, the importer may refuse the shipment, or waive the discrepancy and proceed with the transaction.

Export credit. The term describes a range of facilities and can mean different things in different contexts. Strictly speaking, export credit refers to the credit extended by exporters to importers (supplier credit) or the medium- and long-term loans used to finance projects and capital goods exports (buyer credit). It includes credit extended both during the period before goods are shipped or projects completed (the preshipment period or precredit period) and the period after delivery or acceptance of the goods or completion of the project (the postshipment period or credit period).

Export Financing. Export Financing is available from a broad range of public and private sector sources, in addition to any funds provided through internal financing, that is using your personal or company's own resources. This can be in the form of debt such as your credit card or a line of credit from your bank, or in the form of equity from "shareholders" or interested parties. Whatever the chosen financing solution may be, it will be important to mitigate any business or financial risks created so as to make your business more attractive for increased lending/investment. Having this financing in place can be critical to the success of your export venture.

In this guide, we use the terms Export Financing and Export Finance interchangeably to mean the financing that an exporting business requires to help them run their business. Distinctions will be made for short-term versus long-term export financing. It is important to note further that in some parts of this text and in other sources, the term "Export Financing" is used to mean "foreign buyer financing", or simply Buyer Financing, or even Buyer Credit. Other synonyms often used are vendor financing or supplier financing.

Factoring. A trade finance mechanism whereby an exporter sells its export receivables (bills of exchange or promissory notes, or simply issued invoices, which the exporter is selling on an open account basis) at a discount. The company purchasing the receivables is called a factor. Factors are normally specialized financial services companies, but many are owned by banks. Normally, after the factor has purchased a receivable, the importer or buyer pays the factor directly. Some factors actually issue the invoices to buyers and, in effect, operate the exporter's sale ledgers. Some factors operate on a non-recourse basis (i.e., they assume the risk of nonpayment). Less frequently, the factor will take recourse to the exporter for all or part of the sums involved in the event of nonpayment or delayed payment by the buyer.

Foreign Buyer Financing: This sort of financing is usually arranged by a seller or exporter (or a financial institution) to help entice a potential customer to buy the sellers goods or services. It is usually long-term in nature. Many of the private and public sector financial institutions listed in this guide can and do provide such financing and this area is specifically covered. In order to avoid confusion when speaking with these institutions, it is usually best to be clear up-front as to which party to a commercial transaction actually needs the financing support.

Guarantee. An insurance policy issued to an exporter in respect of short-term export credits might be called a short-term guarantee, and a policy issued to a bank in respect of a medium-term loan to finance a project might be called a buyer credit guarantee. The term can also refer to the facilities issued by banks to overseas buyers in respect of contract performance (e.g., performance guarantees).

Guarantor. The provider of a guarantee of repayment. This can be a government, a bank, a parent company, or an individual. The guarantee will be in respect of repayment of a debt obligation under a contract or loan agreement.

Incoterms. Shipping terms which convey the price basis and the passage of title of a shipment. Common examples are:

F.O.B. (Free on Board) requires the seller to deliver the goods to the ship, airline or other agreed mode of transport, at which time title (ownership and risk) passes to the buyer.
C.I.F. (Cost, Insurance & Freight) requires the seller to cover the cost of transport to the port of destination, and to provide appropriate insurance coverage.

Isabella clause. A clause or provision in a contract or loan provision that separates the obligations, rights, and responsibilities under the contract from those under an associated loan agreement. Such a clause may be inserted when export credit agencies issue buyer credits. Buyer credit loans subject to an Isabella clause thus involve "clean" repayment obligations on the borrower, irrespective of what may be happening under the contract being financed. In other words, problems with the contract or project do not give the borrower any right to default or delay payment on the loan or to suspend repayments.

Late payments. Payments of principal or interest on a buyer credit loan agreement, or payments contractually due under supplier credit arrangements, that are overdue.

Length of credit. The period from the starting point of credit until the final repayment date. The starting point of credit is generally the time of shipment or acceptance of the goods or of the commissioning of a project. The length of credit is normally no more than six months for short-term business, five years for medium-term business, and ten years for long-term business. Premiums are normally charged with reference either to the length of credit or to the horizon of risk (which includes the precredit period, before the starting point of credit).

Letter of credit. A document issued by a bank guaranteeing payment on behalf of one of its clients when all the conditions stated in the letter have been met. This is a very important mechanism of world trade, including for export credit agencies both in their short-term business and, less frequently, in their medium-term business. Letters of credit can take a variety of forms, but essentially they are a means of payment between an importer and an exporter via their banks. The importer is sometimes called the opener, and the importers bank the opening bank (or sometimes the issuing bank). The bank in the exporter's country is called the advising bank, and the exporter is called the beneficiary. A letter of credit may be revocable, which means that it can be canceled or modified by the importer or the importer's bank without prior approval from the beneficiary. Thus, a revocable letter of credit offers little security to exporters. The more commonly used irrevocable letter of credit (ILC) cannot be modified without the prior approval of the beneficiary. Unless the letter of credit is conditional, the bank issuing it effectively assumes the risk of default by the importer, provided that the terms and conditions of the letter of credit are fully met. The advising bank, on the other hand, is not required to pay the beneficiary unless and until it receives the funds from the issuing bank. Thus, even ILCs do not provide full protection to exporters. Letters of credit can also be confirmed. This is done either on an open confirmation basis, in which case the issuing bank is aware of the confirmation, or on a silent confirmation basis, in which case the issuing bank and the importer or buyer may not be aware. Confirmed letters of credit reduce certain risks for exporters, for example the risk that the issuing bank may fail or be unable to transfer foreign exchange. But a key point is that when the exporter seeks payment from the advising (or confirming) bank, it must meet all the terms of the letter of credit. Thus, it is vital that exporters carefully read all the conditions and requirements, as these can sometimes be onerous and may contain provisions that significantly reduce their benefit from the transaction. As many as 40 percent of applications from exporters for payments under letters of credit are rejected because of mistakes in documentation and the like. Obviously, this leads to payment delays. But even under a confirmed letter of credit an exporter may be exposed to risks, for example those that arise before the letter of credit is opened.

Limited recourse financing. A technique in which a major project is financed or insured by an export credit agency with reference to the viability of the project and its cash flow, rather than by reference to the general financial strength or creditworthiness of the buyer, borrower, or guarantor. The earnings of the project thus provide the essential security for the lender and the insurer. The security package may also involve the retention of foreign currency earnings from the project in an offshore escrow account. Now more commonly called project financing.

Line of credit. A kind of buyer credit in which a bank in the exporting country lends to a bank in the buying country money to be used to finance one or more contracts. Lines of credit are most commonly used for medium- and long-term business. But in certain circumstances they can be used for short-term business (e.g., where it is difficult to underwrite individual buyers). In a project line of credit, the contracts being financed are for a single project. In a general purpose or shopping list line of credit, the contracts to be financed may be varied, provided they meet the eligibility criteria set out in the loan documentation.

Long-term export financing generally means where credit is granted to an exporting business for a period longer than 12 months (usually a few years), is part of the capital structure of the business (alongside equity) and is used to fund long-term productive assets (such as plant and equipment, etc.).

Medium-term business, medium-term credit. Conventionally, business with a credit period of between one and five years. However, under the OECD Arrangement, medium-term business is that with a credit period of two to five years. There are no universally accepted or generally applied divisions between short-term business and medium-term business, or between medium-term and long-term business.

Nonrecourse financing. An arrangement whereby a bank (or a factor or a forfaiter) either buys a debt from an exporter or finances its exports but agrees not to seek recovery from the exporter if there are repayment difficulties. In other words, the buyer relieves the exporter of all risks of nonpayment.

Open account, open account business. Trade finance business whereby goods are shipped and delivered and payment is made on the basis of invoices, usually in cash. There are thus no bills of exchange or promissory notes, and the exporter relies on the importer to pay in accordance with the invoice or terms of the contract. Open account business is thus most commonly used where seller and buyer have a good, long-standing trading relationship.

Open confirmation. Confirmation of a letter of credit in such a manner that the importer and the importer's bank (the opening bank or issuing bank) and, where relevant, the authorities and the central bank in, the importing country are aware of the confirmation.

Overdue payment. Payment under a contract or a loan insured by a credit insurer that has not been made on the due date but that is not yet sufficiently late for the insured party to submit a claim to the agency. Exporters are normally required to report payments that are overdue by more than a week or so to the credit insurer, which will then consider the need for loss minimization and may withdraw credit limits issued to other exporters on the same buyer.

Performance bond, performance guarantee. A facility normally issued by a commercial bank to a buyer, in effect to guarantee that the exporter will meet the terms of its contract with the buyer. The bond or guarantee will normally be for only part of the contract value. Performance bonds and guarantees are normally conditional; that is, they can usually only be called if the buyer can demonstrate (in accordance with the terms of the facility) breach of contract by the exporter. However, sometimes these bonds are unconditional.

Personal Bankers offer personal credit (term loans, lines of credit, or credit cards) that you can use to fund your small business. The benefit is that these are relatively simple products that we all use in our personal lives and are quick to set up. The downside is that, of course, your personal credit is supporting your business needs. However, for most small entrepreneurial businesses, this will always be a basic requirement.

Political risk. The risk of nonpayment on an export contract or project due to action by an importer's or buyer's host government. Such action may include intervention to prevent the transfer of payments, cancellation of a license, or acts of war or civil war. Nonpayment by sovereign buyers themselves is also a political risk. Political risk is one of the two main categories of risks insured by credit insurers (the other being commercial risk).

Postshipment period. The period from the date on which goods are shipped or accepted until the last payment has been received. Sometimes called the credit period.

Preshipment period. The time from the date of an insured contract until the date of shipment (or of acceptance by the buyer)-in other words, the period up to the time the credit period begins.

Private buyer. A buyer that is neither a government nor a public sector agency.

Promissory note. An unconditional promise to pay a certain sum on demand on a specified due date. Promissory notes are widely used in international trade as a secure means of payment. They are drawn up by a buyer or importer in favor of a creditor or exporter, normally referred to as the payee or beneficiary. When endorsed by the payee, if the buyer is considered creditworthy, a promissory note can be sold or traded (e.g., to a factor or forfaiter).

Public buyer. A buyer that is owned wholly or in a majority or controlling part by a government but that (unlike a sovereign buyer) cannot commit the full faith and credit of the government but can be sued and made bankrupt.

Recourse. An attempt to recover a claim that has been paid. Recourse can arise in various contexts. For credit insurers, it most frequently occurs in situations where a borrower fails to pay and can demonstrate that this failure occurred because the exporter was in breach of its contract with the borrower. The credit insurer then has the right to take recourse to the exporter to recover any claims payment it may have made on the transaction (e.g., to a financing bank). Similarly, if a credit insurer pays a claim to an exporter, and subsequent events show that the reason for the buyer's nonpayment was not a covered risk, recourse can be taken to the exporter to recover the claim. Finally, if a factor or forfaiter has purchased a facility that is not a nonrecourse facility, it may seek recourse from the exporter if the buyer (or the accepter or avaliser of the bill of exchange or the issuer of the promissory note) defaults.

Red Clause Credits. Letters of credit (L/C) issued with special provisions or clauses which 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.

Repudiation. The refusal of a buyer to accept or take delivery of goods for which it has contracted, provided that this is not due to breach of contract by the exporter (e.g., late delivery).

Sight/Term Credit. Letters of credit may be issued with a variety of "tenors" which determine the timing of payment. A "sight" credit is payable literally upon receipt at the counters of the appropriate party (allowing reasonable time for verification of documents), whereas a "term" credit involves payment at some future date, such as 60 days (after) sight, or 30 days after the shipment date, as agreed between the buyer and seller.

Shipping documents. Documents that relate to the circumstances of conveyance and delivery of goods. Their possession normally represents title to the goods in question. The stage at which these documents are handed over to importers or buyers is therefore important, not least in terms of whether payment is made at this stage (see documents against payment, cash against documents) or the documents are exchanged for some form of promise to pay (see bill of exchange or promissory note).

Short-term means generally credit with a maturity of less than 12 months, also known as working capital or the day-to day operating capital that a business needs to operate.

Short-term business, short-term credit. Transactions involving a maximum credit period of, usually, 180 days, although under some definitions it can extend to 360 days and, in exceptional cases, to two years. There is no universally accepted dividing line between short-term and medium-term credit.

SME. Small and medium enterprise (or small to medium-size business)

Small Business Banker. Most banks offer specialized business services to smaller companies with borrowing requirements of less than $250,000. If that’s your situation, rather than work with a personal banker, whose tools or options for support may be somewhat limited, you may be able to work with a Small Business banker, who can generally offer a wider range of services (including items like payroll). Such services may also include a greater variety of options under lines of credit, with different costs and benefits and likely more flexibility. At some institutions, such services may be branded as being specifically dedicated to better helping small entrepreneurs, or small business, or other similar titles. So, it pays to shop around and discover the full range of such services offered by each institution

Sovereign buyer. A government buyer, or another buyer that can commit the full faith and credit of its government (and which cannot be made insolvent or bankrupt).

Sovereign risk. A term broadly synonymous with political risk but particularly relevant to defaults by or act of host governments. ions

Stand-by letter of credit. A letter of credit that provides for payment by a bank (the opening bank or issuing bank) to a beneficiary only in the event that the circumstances set out in the letter of credit come to pass at some future date. Such letters are often issued by banks in one country to beneficiaries in another and could, for example, be activated in the event of breach of contract by an exporter. Stand-by letters of credit are often used in international trade in lieu of a performance bond or performance guarantee. They are also covered by the International Chamber of Commerce's Uniform Customs and Practices Guidelines.

Supplier credit. Credit extended by an exporter (supplier) to an overseas buyer as part of the export contract. Cover for this transaction may be extended by the export credit agency to the exporter. Such arrangements are much more common in short-term business. When they arise in the area of medium-term credit, the buyer normally makes a cash down payment (up to 15 percent) and then accepts bills of exchange or issues promissory notes for the balance, at some stage before final delivery or acceptance of the goods.