TRADE FINANCE TERMS

Trade Finance Terms with Real-Life Examples

Letter of Credit (LC): A buyer in the US purchases machinery from a supplier in Germany. The buyer’s bank issues an LC guaranteeing payment to the supplier once the machinery is shipped and documents are verified.

Bill of Lading (BOL): An exporter in India ships textiles to the UK. The shipping company provides a BOL that serves as proof of shipment and title to the goods.

Documentary Collection (DC): A coffee exporter in Brazil sends shipping documents to a buyer's bank in Italy. The buyer pays their bank to receive the documents and claim the coffee.

Trade Credit: A wholesaler in the US receives electronics from a supplier in Japan with payment terms allowing 60 days to pay after delivery.

Invoice Discounting: A small furniture manufacturer in Canada sells invoices to a financing company to receive upfront cash for invoices due in 30 days.

Factoring: A UK-based clothing retailer sells its accounts receivables to a factoring company to improve cash flow while awaiting customer payments.

Export Credit Insurance: A wine exporter in France insures against the risk of non-payment by buyers in Asia due to political instability.

Standby Letter of Credit (SBLC): A US construction company secures an SBLC from its bank to guarantee payment to a supplier in case of non-performance.

Forfaiting: An Indian exporter sells promissory notes from a foreign buyer to a forfaiter to receive immediate cash instead of waiting for maturity.

Open Account: An electronics distributor in Germany delivers goods to a buyer in Spain and allows payment within 90 days post-delivery.

Advance Payment: A steel importer in the UAE pays a supplier in China 30% upfront to begin production of custom steel parts.

Consignment: An art gallery in New York agrees to sell paintings on behalf of an artist in Italy, paying them only after the artwork is sold.

Documentary Credit: A pharmaceutical company in Switzerland imports medical equipment under a documentary credit that ensures compliance with specific shipping terms.

Bank Guarantee: A contractor in Saudi Arabia provides a bank guarantee to a client to secure performance and mitigate financial risks.

Deferred Payment: A food importer in Malaysia agrees with a supplier in Indonesia to pay 60 days after receiving the shipment.

Trade Finance Loan: A cocoa importer in the Netherlands secures a short-term loan to finance the purchase of raw cocoa beans from Ghana.

Import Financing: A US retailer uses import financing to pay for goods from China, repaying the lender once the goods are sold locally.

Trust Receipt: A Malaysian importer uses a trust receipt to take possession of imported cars and sell them before repaying the financing bank.

Supply Chain Financing (SCF): A car manufacturer in Japan collaborates with banks to offer early payment to suppliers at a discount, improving the suppliers’ cash flow.

Performance Bond: A construction company in Australia provides a performance bond to ensure project completion as per the contract terms.

Customs Bond: An importer in the US uses a customs bond to guarantee payment of duties and taxes on goods cleared at the port.

Clean Payment: An exporter in Vietnam ships goods to a buyer in Thailand, who pays for the goods directly without involving documents or guarantees.

Revolving Letter of Credit: A textile buyer in Bangladesh uses a revolving LC to regularly import fabric from India under a single credit line.

Export Credit Agency (ECA) Financing: A solar energy company in Africa receives financing from an ECA-backed loan to import solar panels from Europe.

Countertrade: A Russian oil exporter agrees to barter crude oil for agricultural equipment from a US supplier instead of cash payment.

These examples demonstrate how trade finance tools are used to manage risks, facilitate transactions, and ensure smooth operations in international trade.