Trade Finance Glossary – ECKERMANN & PARTNERS

Basic Definition in Banking and Trade Finance

Overdraft

Credit Facility usually provided through your current account facility, made available for clients with a good credit standing
Unsecured advance/ credit made on the basis of expected business and / or on future anticipated proceeds

Storage / Warehouse Financing

Purchased goods shall be warehoused for a period of time; whereby the WH can be utilized as a collection point/storage place until enough goods/commodities are stored for on sale or for processing purposes
Goods will be held to the order of the Financial Institution (‘FI’)
Liked by smaller traders because the bank finances the asset until on sell is concluded
‘Bigger’ trader sells inventory (i.e. commodities) to the financier with repo structure to turn inventory into cash whenever needed and the bank sells back in the future
Often referred to as Inventory Finance (a misnomer)
Quality of WH mgmt. & jurisdiction to enforce your legal rights as a financier must be discussed
Market price development of the underlying goods must be managed right

Storage now with or without Collateral Mgmt Agreement (CMA) or Stock Monitoring Agreement (SMA)

Quality of Collateral Mgmt. Agent or Stock Monitoring. The agent should be assessed before decision making (i.e. track record with WH and country, liability issue, insurance coverage, etc.)

Borrowing Base

Combination of Inventory and Receivable Finance
Assets of our borrower are usually the base of the Borrowing Base Calculation;
Different lending ratios (or LTV ratios) are assigned to different assets classes of the borrower; the sum of assigned values reflects the borrowing base value
Degree of security involvements varies
Borrowing Base Agent is crucial to be assessed

Discounting Facilities – Invoice discounting at a margin,

Invoices issued by approved, acceptable buyers submitted to the bank on a case by case basis
With or without recourse to the client
Sometimes insurance cover from an acceptable credit insurance company is added;
The financier has to be either named loss payee under the insurance policy or the proceeds must be assigned to the bank
Supplier/seller can immediately cash the invoice form the offtaker;

Discounting Facilities – Bills of Exchange discounting

Traders pay suppliers and receive a BoE from the buyer which can be discounted by the Financial Institution
With or without recourse to the client

Discounting Facilities – LC discounting

Receivables (Purchase) Finance Define receivables

Purchase Order / Contract Finance Facility

Financing of goods listed under third party confirmed purchase orders/contracts from pre-approved, acceptable buyers
Repaid from proceeds of purchase orders/contracts, usually
Assigned in favor of FI which means
o Assignment,
o Notification &
o Acknowledgment of assignment

Additional terms to be used if appropriate -pre-shipment / -sold / pre-sold / un-sold, post-shipment

Pre-shipment refers to before goods are transported to WH or destination
Sold / pre-sold / unsold are imprecise terms if no commercial contract has been signed, no commercial rights have been established which influences structure and risk;
Post-shipment refers to after goods were shipped to.WH or destination.
Products Comments

LC driven facilities

Refers to

a) where the bank opens the documentary credit (outgoing LC) for his buyer/importer / trader to purchase supplies / raw material / etc from the exporter/seller / trader
b) an incoming LC, where a bank will act as advising and paying bank for his client, a seller/exporter/trader from the LC issuing bank which has opened the LC obo the importing client elsewhere.

Back-to-Back (LC) Finance

On the strength of an incoming LC – issued by an acceptable bank, acceptable to the trader’s bank in terms of risk and credit standing, trader’s bank will open a mirror LC (outgoing) obo the bank’s client to purchase the supplies needed to satisfy the incoming LC.
Back-to-back facility (B2B) is issued on the same terms and conditions of a confirmed inward letter of credit. Goods are transported directly from supplier to final destination and documents requested under the inward letter of credit (except for the commercial invoice) shall be called for under the outward letter of credit.
The facility may include some deviations such as different trade terms, expiry places, currencies, and some documents that may not be called for under the outward LC such as insurance documents or certificate of origin.
If the customer wants a facility with more deviations than the ones identified above, then the facility may be considered on a case by case basis and the relationship with the customer.

FCR / Shipment Finance

Financing of goods made against receipt of a forwarder certificate of receipt confirming receipt of goods at a named place to the order of bank.
Goods to be maintained by the forwarder for a short time window (how short) pending receipt of the sale receivable, or proceeds, at which stage bank will request forwarder to release goods and if applicable
provide the bank with documentation (including where applicable shipping documents) evidencing shipment or dispatch of goods for presentation by the bank for payment.
Shipment finance is generally applied for goods in transit.

Front to Back

Front to back facility to issue an outward letter of credit prior to the receipt of the inward LC on the premise that it is amended in order to be on the same terms and conditions of a confirmed inward letter of credit.
Goods are transported directly from supplier to final destination and documents requested under the inward letter of credit (except for the commercial invoice) shall be called for under the outward letter of credit.
The facility may include some deviations such as different trade terms, expiry places, currencies, and some documents that may not be called for under the outward LC such as insurance documents or a certificate of origin.

Pre Export Finance

The financing of existing and future flows of commodities;
the borrower is usually a strategically important producer & exporter of commodities
but located in a difficult market, usually due to political or macro-economic conditions,
where access to funds is limited or nonexistent.
Product (commodity) is sold internationally to off-takers (traders) which have a proven track record with the producer.
On that basis, the financing of the borrower appears possible by the Financier because of the commercial track record and the performance & delivery analysis and capability.
Offtaker will repay the facility and acts in the partnership construction as payee, hence, the payment and transfer/conversion risk is short cut and linked to the off-taker(s) of the facility.

Pre Payment (Advance) Finance same like above, but done for different (interesting) reasons;

by and large, off-taker prepays the supplier;
the legal borrower will be the off-taker of the commodity and
the economic beneficiary is the producer/trader.
underlying commercial contract (purchase & sales contract) b/w commodity producer and buyer (off-taker) will have a prepayment clause attached.
Such facilities are also coined limited-recourse (LR) structures, where the offtaker takes a certain percentage of the underlying production and delivery risk.
remaining part (1-LR portion) of the risk is taken by the bank.

Tolling / Processing Finance

The facility requested by trading houses to finance usually a) the raw material to be transported to the tolling company and b) the tolling fee paid to the producer upfront.
Repayment will be done from the finished product which will be given to the offtaker / trader, hence, the assignment of sales proceeds.
Payment risk remains with offtake.
Performance risk with the producer/toller.