7 trade finance terms you need to know!
Want to build spaceships? You won’t get very far without understanding terms like Einstein’s theory of general relativity, quantum mechanics… and others. We aren’t rocket scientists, so how should we know? But this underlying principle is the same no matter what you’re trying to accomplish: you have to speak the language.
This is particularly true of trade finance where even the most experienced professionals can get tripped up by the names of obscure practices.
1. Advance payment
This isn’t ideal. Advance payments are payments to sellers before goods are shipped. This places all the financial risk squarely on the shoulders of the buyer, something that trade finance is supposed to help avoid. But not all trades can be financed. Instability in the buyer’s country is a common reason for advance payment and specialized products also require advance payments in some cases when selling them to a secondary buyer would be difficult in case of buyer default.
2. Blocked currency
Also not ideal from an international trading perspective, blocked currencies are currencies that can’t be exchanged for any other currency, usually due to restrictions from the national government.
3. Demurrage
Probably one of the most hated terms on this list, demurrage is the name for the charges incurred when a shipment has to be stored in a warehouse during transit from the exporter to the importer. This often happens due to a dispute between parties to a letter of credit and can add up fast.
4. Incoterms rules
A set of standardized and internationally recognized trade terms established by the International Chamber of Commerce (ICC). They are routinely referenced in contracting and trade finance and are critical for resolving contractual disputes.
5. Retention/holdback
A contractual condition in which money is withheld until a specified time frame passes that ensures the products received are satisfactory.
6. Surety company
A financial entity, usually an insurance company that guarantees payment of a bond or the performance of an underlying contract in the event of a default or a failure of the contractor to do the job it was hired for.
7. Uniform Rules for Collections
This is a set of rules published by the ICC to aid bankers, buyers, and sellers in the collections process. The URC has been prepared to resolve problems that practitioners have experienced in their everyday operations. Provisions of URC are not legal requirements but serve to establish a common understanding of the collections terminology and expectations.
This small list should help you understand trade finance and use the best tool in trade finance: Envoy. Envoy’s unique model and use of blockchain technology is bringing trade finance into the 21st Century away from the reams of paper that have been holding it back. The aim is to have fewer advanced payments being made with broader options to finance contracts, to help prevent demurrage through smart contracts that make disputes less common and speed up all trade financing processes so that retention time is brought down.
Envoy and the blockchain are an injection of life into the trade finance industry with new growth and new opportunity on the horizon.