menu close menu

Common Trade Finance Terms

Collateral Loan

This is a loan secured by a pledge of assets. Loans secured by collateral are primarily commercial loans where the ultimate source of repayment is the borrower’s assets rather than the borrower’s character or reputation in the community.

Asset Based Lending

This is a form of financing secured by a firm’s balance sheet assets, such as inventory, receivables, or collateral other than real estate.

Pledge

This, also sometimes referred to as security interest, is a transfer or assignment of assets to secure payment of an obligation. The borrower assigns an interest in the property to the lender, which becomes a lien on the collateral.

Mortgage

A mortgage is a debt instrument giving conditional ownership of an asset, secured by the asset being financed. A borrower gives the lender a mortgage in exchange for the right to use the property while the mortgage is in effect, and agrees to make regular repayments of principal and interest. The mortgage lien is the lender’s security interest and is recorded in title documents in public land records.

Warehouse Receipt

This is a document that gives proof of ownership of goods held in inventory, for example, unfinished goods temporarily stored in a field warehouse by a manufacturer. The receipt is a title document for its holder and may be negotiable or non-negotiable. A negotiable warehouse receipt is delivered to the bearer or to another party named; a non-negotiable receipt specifies to whom the stored goods are deliverable. Warehouse receipts in both forms can be used as collateral for accessing working capital loans from a bank.

Collateral

This is normally an asset that has been pledged as security to ensure payment or performance on an obligation. In bank lending, it is generally something of value owned by the borrower. If the borrower defaults, the asset pledged may be taken and sold by the lender to fulfil completion of the original contract.

Credit Risk

This is the risk that a borrower will not pay a loan as called for in the original loan agreement, and may eventually default on the obligation. Credit risk is one of the primary risks in bank lending.

Security Interest

This is the lender’s claim to assets pledged by a borrower securing payment of an obligation. A lender’s interest also known as a lien is said to attach to the borrower’s property, and consists of two limited rights: that of foreclosure and priority.

Letter of Credit

A letter of credit is a credit instrument issued by a bank guaranteeing payments on behalf of its customer to a beneficiary, normally to a third party but sometimes to the bank’s customer, for a stated period of time and when certain conditions are met.

Accounts Receivable Financing

by selling their trade receivables or pledging receivables as collateral for a loan. Direct sale of accounts receivable is a non-recourse type of financing called factoring. An accounts receivable loan from a bank is called a discount: the borrower draws against a line of credit that is less than the full value of his trade credits.

Inventory Lending

This is a form of lending where working capital loans are provided by a lender to finance the purchase of inventory for resale. As the inventory is sold, the loan is gradually paid off. Inventory lending includes warehouse receipt financing. Loans secured by receivables command a higher borrowing base than inventory because receivables are one step closer to cash and qualify for a higher credit advance.

Agricultural Credit

Loans, notes, bills of exchange and bankers’ acceptances financing agricultural transactions. Banks lend to farmers for a variety of purposes, including

  1. Short-Term Credit to cover operating expenses or for working capital.
  2. Intermediate credit for investment in farm equipment and real estate improvements
  3. Long-Term credit for acquisition of farm real estate and construction financing; and
  4. Debt repayment and Refinancing.

Appraisal

Written estimate of market value by a qualified appraiser. Appraised value is one of the key factors determining loan size in loans secured by real estate. The estimated value of real property is based on replacement cost, sales of comparable property, or expected future income from income producing property. 

Loan-To-Value Ratio

Relationship, expressed as a percent, between a principle amount of a loan and the appraised value of the asset securing the financing. In a residential mortgage loan, this is the percentage value of the property the lender is willing to finance with a mortgage e.g. a $160,000 mortgage on a $200,000 house has a loan –to-value ratio of 80%. Lenders customarily set upper limits on the loans they are willing to make, and may require borrowers taking mortgages approaching the appraisal value of the property. Generally, any mortgage loan with a loan-to-value ratio above 80% to take out Private Mortgage Insurance as added security. 

Arbitration

Settlement of a dispute after hearing of opposing arguments, by an arbitrator, rather than a court of law. If binding, arbitration is accepted the parties involved agree to follow the arbitrator’s decision, which is binding only on the parties to the dispute, and is not a legal precedent, unlike a judicial ruling. In deciding complex issues, arbitration can be a more expedient way of resolving disputes than formal litigation and adjudication before a court law.

Bailment

Delivery of personal property for safe keeping by another, with control and possession passing from the bailer (the owner) to the bailee

Back-to-Back Letters of Credit

Two letters of credit, one in favor of the buyer’s agent and one financing the seller. A back-to back letter of credit is created when an exporter holding an irrevocable letter of credit persuades the buyer’s bank (the advising bank) to open a second credit in favor of the merchandise supplier. The two credits are identical in all respects, except that the supplier becomes the beneficiary of the back-to-back credit, and amount of the second credit is less than the original export credit. The difference is the import agent’s commission.

Balance Sheet

  1. Statement of a bank’s financial position listing assets owned, liabilities owned, and owner’s equity as of a specific date. Banks accept deposits (counted as bank liabilities) and make loans (counted as bank assets). This explains the importance of assets Liability management in managing bank profitability and stability in earnings.
  2. Financial picture indicating assets owned and liabilities owed. The difference is referred to as net worth.

Default

Failure to meet a contractual obligation, such as repayment of a loan by a borrower or payment of interest to bond holders. Default gives the note holder, or the holder of mortgage bond, rights and recourse under the mortgage indenture to institute foreclosure proceedings or to accelerate the maturity date.

Demand Loan

Loan with no specific maturity date, but payable at any time. Only interest is paid until the principal is paid off, or until the lender demands repayment of principal. The borrower may however pay off the loan early, without incurring a repayment penalty. If the funds are advanced to a broker, it is referred to as a call loan

Lien

Creditors claim against property to secure repayment of a debt. Alien encumbers the borrower’s property pledged as security, up to the amount of the debt, and guarantees the lender’s rights to collect payment through legal means. E.g A mortgage gives a lender the right to initiate foreclosure proceedings against a borrower in default on the mortgage loan. Alien holder has a prior claim than creditors whose claims are not secured by the borrower’s assets.

Borrowing Base

Amount a lender is willing to advance against the dollar value of pledge collateral. The borrowing base is determined by multiplying the value of the assigned collateral (receivables, inventory, equipment) by a discount factor, a process known as margining. In accounts receivable financing, the lender may agree to advance funds against 80% of current receivables. E.g the borrowing base of a customer pledging receivables of $200,000 is $160,000. As a rule, receivables qualify for a higher borrowing base (and a smaller margin) than inventory because receivables are one step closer to being converted into cash.

Floating Lien

Loan or credit facility secured by inventory or receivables. This type of security agreement gives the lender an interest in assets acquired by the borrower after the agreement, as well as those owned when the agreement was made. When the agreement covers proceeds from sales, the lender also has recourse against receivables.
November 2018
M T W T F S S
« May    
 1234
567891011
12131415161718
19202122232425
2627282930  

Coronet Video