Glossary

here are the definitions of some of the words often encountered in credit insurance and trade finance world. 
  • Accounts Receivable Financing: A type of financing where companies use their receivables as collateral to obtain loans, improving cash flow without waiting for customer payments.
  • Bank Guarantee: A bank guarantee is a commitment by a bank to cover a debtor’s financial obligations if the debtor fails to meet them. This financial instrument is essential in international trade, providing beneficiaries with security against potential payment defaults.
  • Bid Bonds: Bid bonds ensure that a contractor submits a bid in good faith, enters into a contract at the bid price, and provides a performance bond if awarded the contract. This protects project owners from the risk of contractors backing out or failing to meet bid terms.
  • Billing Period: The billing period is the timeframe between delivering a product or service and issuing an invoice, crucial for managing cash flow and meeting payment term requirements.
  • Capital Relief: Capital relief strategies help banks enhance their capital efficiency by transferring some asset risks. These financial products or arrangements reduce the capital banks need to set aside for potential losses, thereby boosting their lending and investment capacities.
  • Commodity Trading: Commodity trading involves buying and selling physical commodities like oil, metals, and agricultural products. Traders operate in global markets, dealing in essential economic goods.
  • Credit Insurance: Credit insurance protects companies against the risk of customer non-payment. It covers losses from commercial risks, such as bankruptcy, and political risks, like war or currency inconvertibility, crucial for both national and international trade.
  • Credit Risk Mitigation (CRM): CRM strategies are financial practices that banks and companies use to reduce the risk of a business partner defaulting. These strategies include collateral, guarantees, and derivatives to hedge against potential losses.
  • Credit Scoring: A statistical analysis performed by lenders to assess a borrower’s creditworthiness, using historical data to predict future credit behavior.
  • Debt Factoring: Similar to factoring, debt factoring involves selling invoices at a discount to a third party, which then assumes the responsibility of collecting payments from the debtors.
  • Debt Recovery: Debt recovery is the process of pursuing payment for debts owed to an organization, an essential part of credit management.
  • Excess of Loss (XoL) Credit Insurance: XoL insurance is designed for large companies with strong credit management. It covers losses exceeding a set amount, offering flexibility and a degree of risk retention.
  • Export Credit Agency (ECA): ECAs are public or quasi-public institutions providing government-backed loans, insurance, and guarantees to support domestic companies exporting goods and services, mitigating risks in challenging markets.
  • Export Credit Insurance: A policy that provides coverage against the risks associated with exporting goods and services, including commercial and political risks, ensuring that exporters are paid even if the foreign buyer defaults.
  • Factoring: Factoring is a financial transaction where a company sells its receivables to a third party at a discount. This provides immediate cash flow, allowing the company to continue operations without waiting for customer payments.
  • Financial Institutions: Financial institutions offer a wide range of services, including deposits, loans, investments, and currency exchange. Examples include banks, insurance companies, pension funds, and brokerage firms, all pivotal to the global economy.
  • Financial Lines: Financial lines insurance covers risks associated with financial transactions, such as professional indemnity, directors’ and officers’ liability, and crime insurance, protecting companies from financial loss due to litigation, mismanagement, or criminal activity.
  • Forfaiting: Forfaiting involves exporters selling medium and long-term receivables to a forfaiter at a discount, providing immediate cash and eliminating buyer default risk, thereby facilitating international trade.
  • Invoice Discounting: Invoice discounting allows companies to borrow money against outstanding invoices, improving cash flow by receiving advances from lenders while waiting for customer payments.
  • Letter of Credit (LC): A letter of credit is a bank-issued document guaranteeing payment to the seller on behalf of the buyer, subject to certain conditions. Widely used in international trade, it reduces non-payment risks and ensures exporters receive payment upon fulfilling contractual obligations.
  • Maximum Extension Period (MEP): MEP is the longest period allowed under a trade credit insurance policy to extend a payment’s due date beyond original terms, aiding companies in meeting customer needs while managing risk.
  • Payment Guarantees: Payment guarantees ensure contractors pay subcontractors, suppliers, and laborers, protecting those working for the main contractor from non-payment risks.
  • Payment Terms: Payment terms specify the timeframe within which a buyer must settle an invoice, crucial for managing cash flow and credit risk in business transactions.
  • Performance Bonds: Performance bonds guarantee a contractor’s completion of a project, protecting project owners from losses due to inadequate performance or non-completion.
  • Political Risk Insurance: This insurance protects companies from losses due to political events like expropriation, nationalization, political violence, or currency inconvertibility, especially valuable for operations in politically unstable regions.
  • Protracted Default: Protracted default occurs when a buyer fails to pay an invoice long after the due date without declaring bankruptcy, requiring the seller to seek cover through trade credit insurance.
  • Receivables Financing: A financial arrangement where a company uses its receivables as collateral to obtain immediate funds, enhancing liquidity and operational continuity.
  • Risk Assessment: Risk assessment evaluates potential risks associated with lending, including a buyer’s creditworthiness and the political and economic stability of their country.
  • Securitisation: Securitisation involves pooling various types of debt, such as mortgages or loans, and selling them to investors as consolidated financial instruments, diversifying risk and providing liquidity to original lenders.
  • Selected Buyer Policies: These policies provide insurance cover for transactions with selected buyers, allowing companies to insure against default risks on key customers or contracts.
  • Single Buyer Insurance: Single buyer insurance is tailored for companies with few customers, covering credit risks associated with specific buyers and protecting against non-payment on high-value contracts.
  • State of Default: A state of default occurs when a buyer fails to make a payment within agreed terms, including any extensions, prompting the seller to stop further deliveries and potentially triggering trade credit insurance to recover the unpaid amount.
  • Surety Bond: A surety bond is a three-party contract where the surety company assures the project owner that the contractor will fulfill contract terms, mitigating project default risks.
  • Top-up Cover: Top-up cover provides additional protection to existing credit insurance policies, allowing companies to increase protection against buyer default beyond main policy limits.
  • Trade Credit: A type of commercial financing where suppliers allow buyers to purchase goods or services and pay for them later, typically within 30 to 90 days, facilitating smoother cash flow management.
  • Underwriting: Underwriting is the process by which insurers assess the risk of insuring a business or asset, setting the terms and price of the insurance accordingly.
  • Whole Turnover Policy: This insurance covers non-payment of all customer invoices, providing comprehensive protection, enhancing financial stability, and supporting credit management in all transactions.