Terms & Definitions

Acceptance:

Refers to the commitment by an Importer, evidenced by their accepting a Bill of Exchange drawn on them by an Exporter, to pay for goods at a fixed date in the future.

Acceptance Credit:

A Letter of Credit which includes a term bill of exchange in its required documentation. The bill will be accepted by the bank on which it is drawn, usually the issuing or advising bank, and the proceeds paid to the beneficiary at maturity.

Advance Payment Guarantee:

A guarantee issued by a bank, on behalf of a seller to a buyer, in relation to any advance payment that is made by the buyer to the seller to allow the contract to commence. If the contract is not completed the buyer can claim reimbursement of the advance payment under the guarantee.

Advising Bank:

A bank normally located in the country of residence of an Exporter, used by an Importer's bank to validate the authenticity of a Letter of Credit before the Letter of Credit is passed to the Exporter..

Amendment:

A change in the terms to a Letter of Credit that is already issued. Such changes can only be made with the agreement of all parties to the Letter of Credit.

Applicant:

The Importer who applies to an issuing bank for a Letter of Credit, or a Guarantee/Bond.

Availability:

A term used in Letters of Credit to indicate the bank nominated by the issuing bank to pay, accept, incur a deferred payment, or negotiate the Letter of Credit on their behalf. Sellers should ensure the Letters of Credit are available with one of their relationship banks.

Avalize:

The process by which a third party, usually a bank guarantees the undertaking of the drawee to meet their responsibility under a Bill of Exchange. The words "Per Aval" and the signature of the avalizing (guarantor) party must be written on the Bill.

Beneficiary:

The Exporter in a Letter of Credit, or the party authorised to claim from a bank under a Guarantee/Bond.

Bid Bond/Guarantee:

A guarantee issued by a bank on behalf of a seller to a buyer to support the sellers bid or tender for a contract. If the sellers bid is accepted, and they fail to sign a contract, the buyer can claim compensation under the guarantee.

Bill of exchange:

This is an unconditional order in writing drawn up by the seller asking the buyer to pay a specific amount of money immediately or at a future date.

CAD (cash against documents) or D/P (documents against payment):

This is a collection where a bank is asked to release shipping documents to a buyer when they have been paid the collection amount. See collections for a full explanation.

Carrier:

Person or company hired for the conveyance of goods e.g. shipping company .

CFR (C & F or cost and freight):

This is an INCO term and explains what the price quoted represents and the responsibility of the buyer and seller in relation to arranging for the various costs associated(e.g. insurance, freight, duties) with the shipment. It can be used in sea, road or air transport.

CIF (cost, insurance and freight):

This is an INCO term and explains what the price quoted represents and the responsibility of the buyer and seller in relation to arranging for the various costs associated(e.g. insurance, freight, duties) with the shipment. It is normally used in sea or air shipments.

CIP (cost, insurance and carriage to point of destination):

This is an INCO term and explains what the price quoted represents and the responsibility of the buyer and seller in relation to arranging for the various costs associated(e.g. insurance, freight, duties) with the shipment. It is normally used for road transport but can also be used for a combination of transport methods when the goods are to be delivered by the seller to the buyer's premises.

Collection:

This is where a seller sends documents relating to a shipment through his or her bank to the buyer's bank asking that they are released when a payment is made (CAD or D/P) or a bill of exchange is accepted (D/A).

Collection letter:

This is the covering form or letter sent by a bank or seller requesting that the enclosed shipping documents and/or bill of exchange be released to a buyer against acceptance or payment.

Confirmed letters of credit:

This is where a bank other than the issuing bank also guarantees payment under the letter of credit. It normally is used if a seller finds the issuing bank an unacceptable risk and asks his or her own bank or another acceptable bank to guarantee (confirm) the issuing bank's letter of credit. See letters of credit for a full explanation.

Consignee:

The party on a transport document to whom the goods are addressed for delivery.

Consignor:

The party on a transport document on whose behalf the goods are being shipped.

Credit Risk:

The risk that a buyer or seller will not complete a deal due to their inability to meet their obligations, or a deterioration in their financial position.

D/A (documents against acceptance):

This refers to shipping documents which are presented to a bank on a collection basis to be passed to the buyer when he or she accepts a bill of exchange. The bank holds the bill of exchange until it ends (maturity) when they ask the buyer to pay the seller. See collections for a full explanation.

D/P (documents against payment) or CAD (cash against documents):

This refers to shipping documents which are presented to a bank on a collection basis to be passed to the buyer (drawee) when payment is made.

Debtor Insurance/Export Credit Insurance:

This is an insurance policy purchased by a seller to provide protection against non-payment by a buyer due to insolvency or political/economic turmoil in the buyers country.

Deferred Payment Credit:

A Letter of Credit payable at a future determinable date in which a term Bill of Exchange is not required to evidence the maturity date. (see Acceptance Credit).

Discounting:

The purchase of accepted term Bills of Exchange at a discount to allow for the funding of the advance from the discount date until the maturity date of the bills.

Discrepancy:

Where documents presented by an Exporter under a Letter of Credit do not comply with the terms of the Letter of Credit or are inconsistent with other documents presented.

Dishonour:

The refusal to pay or accept a Bill of Exchange.

Documentary credit (letter of credit):

See letters of credit for a full explanation.

Documents of Title:

Documents that confer the status of ownership upon the holder of the document e.g. the holder of a correctly endorsed bill of lading has effective ownership of the goods.

Draft:

This can refer to a bank cheque (as opposed to a customer cheque) or it can refer to a bill of exchange.

Drawee:

The party to which a Bill of Exchange is addressed for payment or acceptance. Usually, the Importer in an international trade transaction. In a Letter of Credit transaction it may be the issuing or advising bank.

Drawer:

The party that issues a Bill of Exchange. Usually, the Exporter in an international trade transaction.

eUCP:

Supplement to Uniform Customs and Practice for Documentary Credits which governs electronic presentation of data under Letters of Credit.

Ex works:

This is an INCO term and explains what the price quoted represents and the responsibility of the buyer and seller in relation to arranging for the various costs associated(e.g. insurance, freight, duties) with the shipment. It is normally used in road transport but can also be used for a combination of transport methods when the goods are to be collected by the buyer at the seller's premises. It usually covers the cost of the goods only.

Expiry Date (Guarantee):

The last day on which the beneficiary can present a valid claim to the bank.

Expiry Date (Letter of Credit):

The last day on which the seller can present documents to the advising or issuing bank.

FOB (free on board):

This is an INCO term and explains what the price quoted represents and the responsibility of the buyer and seller in relation to arranging for the various costs associated(e.g. insurance, freight, duties) with the shipment. It is normally used in sea shipments.

Foreign currency drafts:

These are special foreign currency denominated bank cheques which customers can buy at any branch and send to their clients to pay off debts.

Guaranteed Bill of Exchange:

A Bill of Exchange is an unconditional order in writing, drawn up by the seller, asking the buyer to pay a specific amount of money at a future date. It becomes guaranteed if, after the buyer accepts the Bill, the buyers bank adds its guarantee that the bill will be paid at maturity.

INCO terms (international contract trade terms):

These are official trade shipping terms agreed by the International Chamber of Commerce, Paris.

Irrevocable Letter of Credit :

This is a letter of credit that cannot be changed or withdrawn or revoked without everyone involved agreeing (buyer, seller and banks).

ISP98 :

International Standby Practices (ISP98) developed by the International Chamber of Commerce as the rules that govern the operation of Standby Letter of Credit transactions worldwide.

Issuing Bank:

The bank that issues a Letter of Credit on behalf of the Importer.

Latest Shipment Date:

A date inserted in a Letter of Credit to compel the seller to ship the goods within a specific time period.

Letter of credit:

This is an irreversible guarantee given by the buyer's bank to pay a specific amount of money immediately or on a future date to the seller when he or she presents specific documents before a certain date and under the International Chamber of Commerce rules.

Letter of Credit available by acceptance:

A Letter of Credit available at the counters of the issuing or nominated bank, by acceptance of a Bill of Exchange payable to the seller at a determinable future date.

Letter of Credit available by deferred payment:

A Letter of Credit available at the counters of the issuing or nominated bank, by the granting of a commitment to pay the seller at a determinable future date. Used in countries where Bills of Exchange are not legally enforceable or where the use of Bills of Exchange attracts penal stamp taxes or duties.

Letter of Credit available by negotiation:

A Letter of Credit available with the issuing bank, nominated bank, or, in the case of a freely negotiable Letter of Credit any bank that is authorised to negotiate the sellers Bill of Exchange and shipping documents. See Negotiation.

Letter of Credit available by payment / at sight:

A Letter of Credit available at the counters of the issuing bank or nominated bank, by the granting of payment (including payment of sight Bills of Exchange) once the correct documentation is received from the seller.

Marine Insurance:

An insurance policy arranged by either the buyer or the seller to insure goods against damage in transit. The appropriate Incoterm will determine the responsibility of the buyer or seller to arrange the insurance.

Maturity Date:

The date on which a Bill of Exchange or Letter of Credit becomes due for payment.

Negotiable Instrument:

A negotiable instrument is any document, which permits one party to transfer their rights to a second party by endorsing and delivering the document to the second party. An instrument is only fully negotiable when the party transferring it receives value and the party receiving the document can obtain a stronger legal position than the party transferring the document. For example, a first party transfers their rights to the second party, who are unaware that the transaction is fraudulent and negotiates the instrument in good faith and for value. If the first party has transferred their rights against a third party, then the second party retains a valid claim against both the first and third parties. Examples of negotiable instruments in international trade are cheques, Bills of Exchange and promissory notes.

Negotiation:

The process by which a negotiable instrument such as a Bill of exchange, Promissory Note or Cheque is transferred in good faith and for value. Negotiation only occurs when the transferring party receives value. In international trade this is normally an exchange of funds or a commitment to pay.

Non-Recourse Discounting:

The purchase from the seller of accepted term Bills of Exchange at a discount to allow for the funding of the advance from the discount date until the maturity date of the bills. When the discount is provided on a non-recourse basis the financing bank has no recourse to the seller in the event of non-payment by the buyer or the buyers bank.

Noting (on a bill of exchange):

Noting is a preliminary form of protesting a Bill of Exchange - that is - an initial official statement that the bill of exchange or promissory note has not been paid.

UCP:

Uniform Customs and Practice for Documentary Credit developed by the International Chamber of Commerce as the rules that govern the operation of Letter of Credit transactions worldwide. ICC publication No.500 contains details of the rules currently in use.

URC:

Uniform Rules for Collections developed by the International Chamber of Commerce as the rules that govern the operation of collection transactions worldwide. ICC publication No.522 contains the details of the rules currently in use.

Silent Confirmation:

In a normal confirmed Letter of Credit, the issuing bank will request the advising bank to add its confirmation. A silent confirmation occurs when the issuing bank has not requested the advising bank to add its confirmation but the bank does so at the request of the seller.

Standby Letter of Credit:

A guarantee issued by a bank, on behalf of a buyer that protects the seller against non-payment for goods shipped to the buyer. The buyer pays the seller directly for the goods and only if the buyer fails to pay does the seller claim under the Standby Letter of Credit.

SWIFT:

This is an inter-bank communication system and stands for Society For Worldwide Interbank Financial Telecommunications. Every message is sent in a standard format. This allows the banks' computers to read the messages and to keep the information in their computer systems. This helps to get rid of human errors and reduces the length of time it takes to send messages between banks.

Sample messages sent are shown below.

FM 103 - bank payment on behalf of a customer
FM 400 - bank payment in settlement of a collection
FM 700 - bank issuance of a letter of credit

Revolving Letter of Credit.

A Letter of Credit in which the value of the Letter of Credit is automatically reinstated upon utilisation. A Letter of Credit may revolve by value, time or both. This type of Letter of Credit would be used where the seller is shipping goods on a regular basis to the buyer over an extended period: