Tuesday, September 29, 2009

The Diamond Trade | Diamond Bourses of Antwerp

Diamond Bourses

The word "Bourse" refers to a private stock, bond, or commodities exchange similar to the NYSE. Diamond Bourses are basically trading exchanges for loose, cut and uncut diamonds. The largest diamond trading center in the world is located in Antwerp, Belgium but there are also Diamond Bourses in Israel, Hong Kong, London, Moscow, and Shanghai. Almost 90% of the world's rough diamonds, and about half of the polished diamonds, are sold in Antwerp every year, and the city is the hub of the global diamond trading industry (diamanthandel).
Within Antwerp's diamond district, some 1,500 diamond dealers (diamantbedrijven) are ensconced in small, heavily guarded geographic area surrounded by three main streets, Hoveniersstraat, Schupstraat, and Rijfstraat.
Antwerp's Diamond District
Two of the oldest Bourse in Antwerp were the 'Diamond Club of Antwerp' (Diamantclub van Antwerpen - at Pelikaanstraat 62) founded in 1893, and the Beurs voor Diamanthande (at Pelikaanstraat 78) founded in 1904 [1], both founded by the Hasidim diamantairs, and both still in operation today. These first trading exchanges mainly dealt with the wholesaling of cut stones.

The first trading exchange to deal exclusively with rough, uncut diamonds was the Antwerpsche Diamantkring (Antwerp Diamond Ring) [2], which was established in the same year that the 1930 World Expo was held in Antwerp.
Members of the Diamond Bourses operate within a system based on mutual trust and each member pledges to uphold the traditions and principles of consideration, friendship and trust [2]. Most transactions conducted within the Bourses done with cash and a handshake, and disputes are handled by an internal arbitration process.
After the liberation, and repatriation of Antwerp following the end of WWII, the Antwerpsche Diamantkring was reopened, and the World Federation of Diamond Bourses (WFDB) was founded in 1947. Control over the diamond trade is maintained through the WFDB's Constitution containing a series of rules, regulations, an by-laws that govern business practices, ethics and morality.
In Antwerp today, there are around 4000 diamond-cutters (diamantaire) working in the several-square-block diamond district, bisected by the main street of Hoveniersstraat. Around $16+ billion in polished diamonds pass through Antwerp's diamond bourses each year, making it the largest diamond-trading center in the world .
World Diamond Council
The World Diamond Council (aka International Diamond Council) was established by the World Federation of Diamond Bourses (WFDB) to find ways to reduce the number of conflict diamonds entering the diamond market. The Council began in July 2000 after a joint meeting of the WFDB and its international headquarters are in New York City, NY [4]. The Council has approximately 70 members representing jewelers, traders and manufacturer/producers. In addition to its members, the WDC has observers from the governments of Belgium, Israel and South Africa and works with 35 independent Governments, the European Union and the United Nations to rid the diamond Industry of conflict diamonds.
The Kimberley Process
The Kimberley Process Certification Scheme or KPCS is designed to prevent conflict diamonds (aka "blood diamonds") entering into the mainstream rough diamond market [5]. KPCS originated in May 2000 during a meeting of South African diamond producing states in Kimberley, South Africa.
The Diamond High Council (HRD)
The HRD (Hoge Raad voor Diamant) Diamond High Council is a non-profit industry organization designed to promote and represent the Antwerp diamond trade. The HRD Certificates Department was founded in 1976 to meet an increased demand for quality diamond certificates [9]. The research arm of the HRD works in conjunction with Rijksuniversitair Centrum Antwerpen (Antwerp University RUCA) to increase the diamond knowledge-base.
Bibliography & Suggestions for Further Study on Diamond Bourses
1. Diamond News, Diamond Club Lists . diamondsnews.com
2. Antwerpsche Diamantkring, Antwerp Diamond Bourse . www.diamantkring.org
3. Int. Herald Tribune, Charles Goldsmith , Antwerp Diamonds Lose Cutting Edge . www.iht.com
4. WDC, World Diamond Council . www.worlddiamondcouncil.com
5. United Nations, The U.N. On Conflict Diamonds . www.un.org
6. De Beers, Market for Diamonds . www.debeersgroup.com
7. WFDB, World Federation of Diamond Bourses . www.worldfed.com
8. Diamond Direct, Antwerpen, Centrum Van de Diamanthandel . www.diamantdirect.nl
9. HRD, HRD Diamond High Council . www.hrd.be

The Diamond Trade | & The 'Diamond Pipeline'


Rough Diamond Producers

The trade in gem-grade rough diamonds is primarily controlled by the De Beers, Trans Hex, Rio Tinto, BHP Billiton and a hand-full of other companies which use their cartel power to control the supply of diamonds on the wholesale market (diamond pipeline), thereby controlling and stabilizing prices. Unlike precious metals such as gold, silver or platinum, there is usually a substantial mark-up in the retail sale price of diamonds. There is a limited market for the resale of diamonds that are less than "investment grade."
The 'Diamond Pipeline'
Rough diamonds are sent directly from De Beers mining operations in Africa (#1), or secondary mining producers in Canada and Russia to De Beers' Diamond Trading Company (DTC) in London, Gaborone, Kimberley and Windhoek, for sorting and resale. The rough stones are separated into 16,000 categories based on size, color and quality, then divided by human or automated sorters into individual lots called "boxes." The DTC is part of the DeBeers Group supply-chain known as the Central Selling Organization (CSO), which combines ("aggregating") supplies of rough diamonds from multiple sources into one wholesale market (#2).

The DTC holds a sale called a "site" or "sight" ten times per year in London and Johannesburg, where De Beers sells the "boxes" to its select group ("supplier of choice") of 125 "sightholders" (#3) or diamond manufacturers, cutters, and retailers [5]. De Beers (DTC) sets the price of each box in advance, determining the quantity and quality that each site-holder will receive. A 'sight' can have a value of between $500,000 to $2,000,000 USD.
The sightholder then transports the box of rough diamonds back to diamantaire firms (cutting and polishing factories) located around the world (#4). Many Sightholders are also cutters. Rough diamonds are cut in various geographic regions according to tradition and the skill-sets of the labor force. India cuts the vast majority of small stones (.20 carats or less) in Mumbai (Bombay) and Surat, while large stones are primarily cut in Antwerp, Tel Aviv, Ramat Gan, and New York. Other major cutting centers are located in Johannesburg, China, and Thailand.
The diamonds are then re-sold from the cutting and polishing (manufacturing) centers to wholesalers (Diamond Bourses), or to jewelry manufacturers (#5) around the world. Both traders and manufacturers may sell diamonds "upstream" and "downstream" through the diamond pipeline [8], to take advantage of market fluctuations. Once the diamonds are set into jewelry, they are sold to retailers or direct to the customer.
De Beers and the Future
De Beers' (CSO's) control over the wholesale diamond market has diminished due to increased market penetration, and the breakaway from CSO's cartel by the Argyle Diamond Mine in Australia, and independent diamond producers in Canada, Russia and elswhere. Additionally, diamonds have underperformed since 1987 when compared to the "luxury goods" market or global GDP. De Beers is also facing increasing pressure from the manufactures of synthetic diamonds, which are increasing in popularity and consumer acceptance.
As a reaction to their decrease in market share, De Beers, through their Diamond Promotion Service (DPS) and Diamond Information Centres (DIC) marketing divisions, has launched an aggressive branding and marketing campaign, reclaiming their "A Diamond Is Forever" moniker. (see DeBeers' Adiamondisforever.com website).
Forevermark Diamonds
As a way of staving off the onslaught of secondary diamond markets, and preventing the inherent product misidentification that will follow, the DTC has developed new inscription technologies to "invisibly" mark the table facet of polished diamonds with a "Forevermark" trademark. This mark is only visible via a point-of-sale electronic viewer, and will com with a certificate of authenticity. As of 2006, Forevermark diamonds will be available through sightholder/retailers in the U.S., Europe, Asia, China, and India (2007). De Beers is hoping that the combination of branding and security will increase consumer demand.
Bibliography & Suggestions for Further Study on The Diamond Trade
1. WFDB, World Federation of Diamond Bourses . www.worldfed.com
2. Antwerpsche Diamantkring, Antwerp Diamond Bourse . www.diamantkring.org
3. WDC, World Diamond Council . www.worlddiamondcouncil.com
4. United Nations, The U.N. On Conflict Diamonds . www.un.org
5. De Beers, Market for Diamonds . www.debeersgroup.com
6. Stefan Kanfer, The Last Empire: De Beers, Diamonds, and the World . Farrar, Straus, Giroux
7. National Geographic, Diamonds: The Real Story
8. Ingrid J. Tamm, Diamonds in Peace and War . World Peace Foundation
9. Janine Roberts, Glitter & Greed: The Secret World of the Diamond Cartel . The Disinformation Co.
10. Forevermark, Forevermark Diamonds . www.forevermark.com
11. The Economist, The Cartel isn't Forever . www.economist.com
12. Professional Jeweler Archive, Lev Leviev's Angolan Connection . www.professionaljeweler.com
13. Edward Jay Epstein, The Diamond Invention . www.edwardjayepstein.com
14. ALROSA, ALROSA Co. Ltd. . eng.alrosa.ru
15. Anglo American Corp, Anglo American - Global Leader in Mining . eng.alrosa.ru
16. IADC, Indo Argyle Diamond Council . www.indoargyle.com
17. DiamondWorld, DTC Reveals Select List of Sightholder Diamantaires . www.diamondworld.net

Who Owns the Arctic?


Who owns the Arctic Ocean and any resources that might be found beneath those waters? This question has enormous economic significance. The United States Geological Survey estimates that up to 25% of the world's remaining oil and natural gas resource might be held within the seafloor of the Arctic Region. Significant quantities of other mineral resources might also be present. Control of Arctic resources is an extremely valuable prize. These resources become more accessible as global warming melts the sea ice and opens the region to commercial navigation.
Freedom of the Seas
Since the seventeenth century a "freedom of the seas" doctrine was accepted by most nations. This doctrine limited a nation's rights and jurisdiction to the narrow area of sea along the nation's coastline. The remainder of the oceans were considered as common property that could be used by anyone. This was before anyone had the ability to exploit offshore resources.

Then in the mid-1900's concerns that long-distance fishing fleets were depleting coastal fish stocks triggered a desire in some nations to have greater control over their coastal waters. Then oil companies became capable of drilling in deep water and ideas for the seabed mining of manganese nodules, diamonds and tin-bearing sands started to seem possible. Any nation that claimed a greater distance from shore also made claim to valuable seafloor resources.
Unilateral Claims
In 1945, the United States announced that it assumed jurisdiction of all natural resources out to the edge of its continental shelf. This was the first nation to depart from the freedom of the seas doctrine and other nations quickly followed. Nations began making unilateral claims to seafloor resources, fishing grounds and exclusive navigable zones.

A New "Law of the Sea"
The United Nations sought to bring order and equity to the diversity of claims being made by nations around the world. In 1982 a United Nations treaty known as "The Law of the Sea" was presented. It addressed navigational rights, territorial waters limits, exclusive economic zones, fishing, pollution, drilling, mining, conservation and many other aspects of maritime activity. With over 150 nations participating it was the first attempt by the international community to establish a formal agreement on how the seas can be used. It also proposes a logical allocation of ocean resources.

Under the Law of the Sea, each country receives exclusive economic rights to any natural resource that is present on or beneath the sea floor out to a distance of 200 nautical miles (230 miles / 371 kilometers) beyond their natural shorelines. In the Arctic, this gives Canada, the United States, Russia, Norway and Denmark a legal claim to extensive sea floor areas that might contain valuable resources. (As of November, 2007, the United States had not yet ratified the Law of the Sea treaty. Those who have opposed ratification say that it would limit United States sovereignty)
Continental Shelf Areas
In addition to the 200 nautical mile economic zone, each country can extend its claim up to 350 nautical miles from its shoreline for those areas that can be proven to be an extension of that country's continental shelf. To make this claim, a nation must acquire geological data that documents the geographic extent of its continental shelf and submit it to a United Nations committee for consideration. Most countries with a potential claim to the Arctic are currently mapping the seafloor to document their claim.
One feature of the Arctic Ocean that is of special note is the Lomonosov Ridge, an underwater ridge that crosses the Arctic Ocean between the New Siberian Islands and Ellesmere Island. Russia is trying to document that the Lomonosov Ridge is an extension of the Asian continental shelf, while Canada and Denmark (in regards to Greenland) are trying to document that it is an extension of the North American continental shelf. Any country that can successfully establish such a claim will gain control of a vast amount of seafloor resources in the central portion of the Arctic Ocean.
Looking Forward

In the future, as sea levels rise, current shorelines will migrate inland and the 200 nautical mile economic zone will move inland with them. In areas with gently sloping coastal land this landward advance of the sea could be a significant distance. Perhaps those nations should exploit their most seaward resources first?
In summary, the Law of the Sea Treaty grants significant undersea portions of the Arctic to Canada, the United States, Russia, Norway and Denmark. These nations gain claim the natural resources on, above and beneath the ocean floor up to 200 miles from their shoreline. They can also extend their claim up to 350 miles from shore for any area that is proven to be a part of their continental shelf. All of these nations have gained significant oil and natural gas resources as a result of this treaty.

BNP Paribas seeks $US6.3bn as banks raise cash

AMSTERDAM -- BNP Paribas, France's biggest bank by market value, tapped investors for 4.3 billion euros ($US6.3 billion) in the latest mammoth share issue by banks seeking to repair damage from the credit crunch.
What had been a trickle of deals and rumoured rights issues threatens to become a flood, as banks rush to shore up their finances and free them from the restrictions and high costs of state aid.
BNP said it needed the funds to repay the French government early. The deal will free the bank from direct state shackles at a time when governments are seeking to impose restrictions such as on bonus payments.
Another reason for bank fundraising is to allow them to buy cut-price assets from under-pressure rivals. BNP's fundraising manoeuvre came as Dutch newspapers reported it was in talks to buy the commercial banking unit of nationalised Fortis Bank Nederland.
Switzerland's UBS AG also wants to cut government ties by buying its way out of a "bad bank" deal, its chief executive Oswald Gruebel said in an interview with the Financial Times, but may not be able to do so until late 2010.
Mr Gruebel also said its US wealth management unit Paine Webber is not a core part of the bank's operations but will not be sold at present. "We've had a lot of inquiries from potential buyers but it wouldn't make sense to sell at current valuations," Mr Gruebel was quoted saying.
In Italy, UniCredit SpA is set to announce a four billion euros capital hike after a Tuesday board meeting, turning down state aid and tapping the foundations that make up its core shareholding.
The hike would be aimed at boosting the core Tier I capital ratio of Italy's biggest bank towards eight per cent.
Willing investors
Like counterparts across Europe, UniCredit could be poised to take advantage of improving markets and an apparent investor willingness to support fundraising.
Norway's biggest bank DnB NOR last week unveiled a $US2.4 billion rights issue while Spanish bank BBVA opted to raise two billion euros from a sale of convertible bonds.
In Britain two banks under substantial state control are mulling huge share issues. Royal Bank of Scotland Group Plc has been gauging investor appetite for a share issue of up to four billion pounds ($US6.4 billion), a source familiar with the matter said earlier this month.
And Lloyds Banking Group Plc has said it is considering its own options.
Lloyds, which is reported to be targeting a raise of over 10 billion pounds, raised 4.3 billion in a share issue in June and used the funds to repay about 2.56 billion pounds to the UK government.
Previously HSBC Holdings Plc, not in receipt of direct state aid, raised 12.9 billion pounds to plug losses in its U.S. business and boost its ability to take advantage of troubles elsewhere by pursuing bolt-on acquisitions.
In the last six weeks two Dutch institutions which have received state aid, insurer Aegon NV and bancassurer SNS Reaal, announced share issues to repay part of their aid packages. Aegon said it was selling up to 1 billion euros worth of stock.
Such deals come as US banks start paying back their own aid or paying fees to get out of restrictive asset-guarantee deals, such as Bank of America last week.
US banks Morgan Stanley, JPMorgan Chase & Co and American Express Co said in June they would sell shares as they position to repay billions of dollars borrowed under the US Treasury's Troubled Asset Relief Program
By Ben Berkowitz of Reuters

Financial Analysis

The science of understanding and analysing
business financial statements starts here. And,
we've made it easy.

Just as a physician would not rely on any one test to
diagnose a patient, it is important for the credit
analyst to understand that there is no "one test"
that will achieve the goal of fully understanding the
financial health of a business.

For example, some industries, such as electric and
water utility companies, will often have most of their
money invested in "plant, property and equipment",
with large sums of money financing these projects in
the form of "long term debt".

While a wholesaler or retailer will have fewer dollars
invested in fixtures and more money in inventory -
with a great percentage of the money owed as short
term liabilities owed to vendors in the form of
accounts payable.

Other businesses, such as contractors, architects,
design firms and other professional service
organizations will have few dollars in either fixed
assets or inventory; their primary business is
providing a service. So, there is generally little
needed in the way of an inventory of goods or
elaborate fixtures needed.
Knowledge is Power
Our resources are
available worldwide,
wherever an internet
connection is available.
Contact us:
EMAIL

So, please bear in mind these two important points:

(1) Financial analysis of businesses should be
compared to other businesses within their "peer
group".

It would be unfair to compare a railroad, with it's
need for infastructure...to a brokerage firm, that
provides financial services.

(2) Trend analysis is important in trying to see into
the future. As investment firms often warn, "past
performance is no guarantee of future results".
But, as a financial analyst, you will often detect
certain trends when you examine the financial
statements of a business over a period of years.
This is why it is important to review more than just
one year's financial statement. Do the math...and
compare results in each year...and try to determine
a trend.
Balance Sheet Components
The balance sheet is the financial statement that
reports the assets, liabilities and net worth of a
company at a specific point in time. Assets represent
the total resources of a company, which may shrink or
increase depending on the results of operations.
Assets are listed in liquidity order - ease of converting
into cash. Typical assets include: cash, accounts
receivable, inventory, fixed assets and a number of
miscellaneous assets we have classified as "other
assets". Liabilities include what a company owes:
accounts and notes payable, bank loans, deferred
credits and "miscellaneous other". All businesses
divide assets and liabilities into two groups: current
(convertible to cash within a year) and non-current.
Net worth is the owner's investment (in the case of a
proprietorship or partnership) or capital stock (original
investment) plus earned surplus (earnings retained in
the business) in the case of a corporation.

Current Assets
Current Assets (sometimes referred to as trading
assets) include cash, trade receivable and inventory.
These are items that can be converted to cash in less
than one year or in the normal operating cycle of a
business. Also included in this category are any
assets held that can be readily turned into cash with
little effort, such as government and marketable
securities.

Current Assets - Cash
Cash refers to cash on hand on in banks, checking
account balances, and other instruments such as
checks or money orders that have not yet been
deposited. A rule of thumb is that cash positions are
generally strongest after the peak selling season.
When cash balances are continually small, it may be
that a business is experiencing slow receivable
collection or some other financial weakness.

Current Assets - Marketable Securities
Marketable securities are found on many balance
sheets. Marketable securities can include: government
bonds and notes, commercial paper, and/or stock and
bond investments in public corporations. Marketable
securities are usually listed at cost or market price,
whichever is lower. Accountants will frequently list
securities at cost with a footnote indicating market
price on the balance sheet date. (When marketable
securities appear on a statement, it frequently
indicates investment of excess cash.)

Current Assets - Accounts Receivable
Sales between most businesses are made on a credit
basis. Accounts receivable indicate sales made and
billed to customers on credit terms. A retailer, such as
a department store, may show its customer charge
accounts billed and unpaid in this category. In many
businesses, accounts receivable are frequently the
largest item on the balance sheet. You should pay
special attention to this category as the company's
financial health depends upon timely collection of
receivables.

Every business that has accounts receivable will
probably have some portion that it is unable to collect
because customers fail to pay for one reason or
another - mismanagement, disaster or intent. Usually a
business will set aside an estimated allowance for
these uncollectable or doubtful accounts. This
allowance called "bad debt" is deducted from the total
receivables shown on the balance sheet. Frequently a
footnote identifying the amount deducted will be found
in the statements.

Current Assets - Notes Receivable
Notes receivable represent a variety of obligations with
terms coming due within a year. Notes receivable may
be used by a company to secure payments from
past-due accounts, or for merchandise sold on
installment terms. In any case, notes receivable should
be reviewed.

Current Assets - Inventory
You will find that inventory includes different items
depending on whether a business is a manufacturer,
wholesaler or retailer. Retailers and wholesalers will
show goods that are sold "as is" with no further
processing or supplies required before shipping. On
the other hand, many manufacturers will show three
different classes of inventory: raw materials,
work-in-process or progress and finished goods. Raw
materials are considered the most valuable part of
inventory as they could be resold in the event of
liquidation. Work-in-process has the least value
because it would mostly likely require additional labor
before the product is finished and has a value in the
marketplace. Finished goods are ready for resale.
Finished goods values can vary greatly according to
circumstances. If they are popular products in good
condition that can be easily sold, then the value shown
might be justified. If the goods are questionable in
their marketability, the value may be carried too high.
The manufacturer's cost of labor employed in the
production of finished goods and goods in process, as
well as factory expenses is included in the value.
Inventory is normally shown on the balance sheet at
either cost or market value, whichever is lower.

As a company's sales volume increases, larger
inventories are required; however, problems can arise
in financing their purchases unless turnover (number
of time a year goods are bought and sold) is kept in
balance with sales. A sales decline should be
accompanied by a decrease in inventory in order to
maintain a healthy condition. If a business has a
sizable inventory, it may have partially completed or
finished goods that are obsolete, or it could reflect a
change in market conditions.

Current Assets - Other Current
This category includes prepaid insurance, taxes, rent
and interest. Some conservative analysts consider
prepaid items as non-current because they cannot be
converted to cash to pay obligations quickly, and
therefore have no value to creditors. Normally, this
category is not large in relation to other balance sheet
items, but if it is sizable it may require further review.

Non-current Assets
Non-current assets are items a business cannot easily
turn into cash and are not consumed within
business-cycle activity. We have defined current
assets as those that can be converted into cash within
one year. In the case of non-current assets, they are
defined as assets that have a life exceeding a year.

Non-current Assets - Fixed Assets
Fixed assets are materials, goods, services and land
used in the production of a company's goods.
Examples include: real estate, buildings, plant
equipment, tools, machinery, furniture, fixtures, office
or store equipment and transportation equipment. All
of these would be used in producing products for a
company's customers. Land, equipment or buildings
not used in the production of customer goods would
be listed as other non-current assets or investments.
Fixed assets are carried on the company's accounting
books at the price they cost at the time of purchase.

All fixed assets, except land, are regularly depreciated
since they are expected to eventually wear out.
Depreciation is an accounting practice that reduces
the fixed asset's carrying value on an annual basis.
The reductions are considered a cost of doing
business and are called a depreciation charge.
Eventually the fixed asset will be reduced to its
salvage or scrap value. Normally the accounting
procedure is to list the fixed asset cost less
accumulated depreciation, which would be shown on
the statement or in a footnote. Bear in mind, not all
companies can be comparable on this item as some
rent their equipment and premises. If a business rents,
its fixed asset total will be probably be smaller
compared with other balance sheet items.

Non-current Assets - Other Assets
Under the other assets category, several items can be
lumped together. The following items may be itemized
separately on other balance sheets, and if significant,
should be closely examined: investments, intangible,
and miscellaneous assets.

Investments of a business represent assets of a
permanent nature that will yield benefits a year or
more after the date of the financial statement. These
may include: investments in related companies such
as affiliates (partly owned) and subsidiaries (owned
and controlled); stocks and bonds maturing later than
one year; securities placed in special funds; and fixed
assets not used in production. The value of these
items should be shown at cost.

Miscellaneous assets include advances to and
receivables from subsidiaries, and receivables from
officers and employees.

Intangible assets are those that may have great value
to an operating company but have limited value to
creditors. Analysts tend to discount these items or
value them very conservatively. Intangible assets may
be: a company's goodwill, copyrights and trademarks,
development costs, patents, mailing lists and catalogs,
treasury stock, formulas and processes, organization
costs, and research and development costs.

Current Liabilities
Current liabilities are obligations that a business must
pay within a year. Generally they are obligations that
are due by a specific date, usually within 30 to 90 days
of fulfillment. To maintain a good reputation and
successful operations, most businesses find they must
have sufficient funds available to pay these obligations
on time.

Current Liabilities-Accounts Payable
Accounts payable represents merchandise or material
requirements purchased on credit terms and not paid
for by the balance sheet date. When reviewing
balance sheets of small companies, you will frequently
find that liabilities principally fall into the accounts
payable line. Suppliers expect their invoices to be
paid according to the terms of sale specified. These
can range from net 30 to 90 days (after invoice date)
plus discount incentives of 1 percent or more if
payments are made by a specified earlier time.

Companies able to obtain bank loans frequently show
small accounts payable relative to all of their current
liabilities. The loans are often used to cover material
and merchandising obligations. Large payables shown
in conjunction with other outstanding loans, may
indicate special credit terms being extended by
suppliers or poor timing of purchases.

Current Liabilities - Bank Loans
If a business has borrowed from a bank without
collateral, the bank loan would be considered
unsecured (no collateral pledged) which is a favorable
sign. It shows the business has an alternative credit
source available other than suppliers, and the
business meets the strict requirements of a bank. On
the other hand, if collateral has been pledged, then
the loan would be listed as secured (the bank has a
claim on part or all of the borrower's assets). Loan
nonpayment can result in the bank satisfying its claim
by taking possession of the secured asset and selling
it. Some companies have a line of credit (a limit up to
which it can borrow) as a bank customer, which is also
a sign that it is regarded as a good risk. This line is
used by companies frequently during peak selling
seasons. However, if a company has a line, you would
be wise to find out the amount to determine the bank's
evaluation of the company. Bank loans listed under
current liabilities are to be retired within a year. Bank
borrowing needs generally will increase along with the
company's growth.
Current Liabilities - Notes Payable
A company's borrowings from firms and individuals
other than banks may be included in this category.
This may be for convenience or because bank
financing was not available. Also, a company may
have a credit agreement with suppliers for
merchandise or materials covered by notes payable
that would secure their position.
Current Liabilities - Other Current Liabilities
Several items are lumped together in this category.
Since a business acquires debt by either buying on
credit, borrowing money or incurring expenses, this
line serves as a catch all for the expenses incurred
and unpaid at the time the statement was prepared.
These items must be paid within a year. For example,
wages and salaries due employees for time between
the last pay day and the balance sheet date are
included in this category. Various federal, municipal,
and state taxes (sales, property, social security, and
unemployment) appear under the heading accrued
taxes. Federal and state taxes on income or profits
may also be found here. If a balance sheet does not
show a liability for taxes and a profit is claimed, the
company may be understating its current debt.

Long-Term Liabilities
Long-term liabilities are items that mature in excess of
one year from the balance sheet date. Maturity dates
(when payment is due) may run up to 20 or more
years. An example of this would be real estate
mortgages. Normally, items in this area are retired in
annual installments.

Long-Term Liabilities - Other Long-Term
The items most often appearing in this category are
mortgage loans, usually secured by the real estate
itself, bonds, or other long term notes payable. Bonds
are a means of borrowing long-term funds for large
and well established companies. When a company is
big enough and financially sound, it will sometimes be
able to borrow money on a long-term unsecured basis.
When this occurs, the unsecured deferred notes are
called debentures. When reviewing unsecured
long-term note payable, you should determine the
holders of the notes. (This information may be found
in the footnotes to the statement prepared by an
accountant.) In smaller companies the owner or
principals of the business will often hold the notes. In a
corporation, the principals can also become creditors
and collect interest. To do this, they simply loan the
corporation money. They would be able to obtain
repayment along with other unsecured creditors in the
event of liquidation. However, at times, other creditors
will require that in event of bankruptcy, officer or
stockholder loans will be paid back last when assets
are distributed. Money invested by stockholders is
rarely recovered if insolvency occurs. It should be
noted that some analysts categorize officer loans as
current liabilities, primarily when repayment schedules
do not exist.
Long-Term Liabilities - Deferred Credits
A deferred credit may indicate that a business has
received prepayment from customers on work yet to
be completed. Since the completed work is still owed
to the customer, the prepayment continues to be
carried as a liability until the product is completed and
delivered, or the prepayment is returned to the
customer. Some businesses will require an advance or
payment for custom work or as a show of good faith.
Net Worth
Net worth represents the owners' share of the assets
of the business. It is the difference between total
assets and total debts. Remember our balance sheet
formula - total assets minus total liabilities equals net
worth (owner's equity). Basically, this is the investment
the owners have at stake in the business. If liquidation
occurs, assets are sold-off to pay creditors and the
owners/stockholders receive what remains. This is why
equity sometimes is referred to as "risk capital."
In proprietorships (owned by an individual) and
partnerships (owned by two or more individuals) the
net worth figure on the balance sheet represents:
Original investment of owners.
Plus... additional investments they have made.
Plus... accumulated or retained profits.
Less... whatever losses have been sustained.
Less... any withdrawals by partners.
On corporate balance sheets, net worth may be
broken down into the following categories:
Capital stock
Capital stock represents all issued or unissued shares
of common or preferred stock. Preferred stock is a
class of stock with a claim on earnings before payment
may be made to common stockholders. Usually
preferred shareholders are entitled to priority over
common stockholders if a company liquidates.
Common stockholders assume greater risk but
normally have greater reward in dividends and capital
appreciation.
Paid-in or capital surplus represents money or other
assets contributed to the business, but for which no
stock or owner's rights have been issued. (i.e. funds
that exceed the stock's par value.)
Earned surplus
Earned surplus is the amount of earnings retained in
the corporation and not distributed in dividends.
When a corporation shows a net worth that has as its
components capital stock and retained earnings,
capital stock represents shares of equity issued to
owners. Retained earnings are the amount of
corporate profits permitted to remain in the business
by design of the officers. Analysts view a sizable
amount of retained earnings as significant. It shows a
business is profitable and successful if it recognizes
the need for net worth growth as the company
progresses.
While the balance sheet gives a very detailed
description of a business, it does not indicate whether
a company is making a profit or losing money. That
information comes from reviewing the income
statement. The net worth reduction can happen in one
of four ways:
1. A loss was sustained
2. Dividends were paid in excess of profits
3. Capital stock was redeemed
4. Assets were written down.
Net worth goes up when:
1. Earnings are retained
2. Capital is added
3. Assets are written up
4. Liabilities are written down
The Income Statement
The income statement (also called the profit & loss
statement) shows how much money a business makes
or loses over a specific time period - a month, 3
months, 6 months or a year. Income statements are
often prepared 4 times a year but never cover a
period longer than a year. When income statements
are prepared, management or its accountants extract
sales and other income totals along with totals of
various expenses from internal accounting records.
Once expenses are computed, they are subtracted
from income and either a profit or loss is shown. The
results on the income statement affect the balance
sheet from period to period, so it is important to review
both statements to determine the full impact each has
on the other.
Income Statement - Net Sales
The net sales figure is derived by adding up the total
invoices billed to customers during the period covered,
less any discounts taken by customers. Then, any
sales returns accepted from customers during the
period are deducted. Deductions can be important in
some industries. (For example, in retailing they can
run over 10 percent.) After deductions are made, the
remaining figure in net sales which is important for
comparative analysis and percentage calculation.
Income Statement - Gross Profit
Gross profit is found by subtracting the cost of goods
sold from net sales. Cost of goods sold is comprised of
those expenses it took to manufacture, purchase
merchandise and service customers. The cost of
goods sold takes into account material costs along
with labor and factory expenses involved in producing
the merchandise sold.
Gross profit measures the profitability of a company's
total production. A successful company's gross profit
will cover its costs of doing business with enough left
over to produce a net profit.
Income Statement - Net Profit After Tax
Before coming up with the net profit after tax (often
called net income after tax), you should be aware that
all expenses directly applicable to the company's
operations, including income taxes, have been
deducted from gross profit. Net profit after tax truly
measures the operating success of the company.
When total expenses exceeds net sales, a minus
figure results and a loss has occurred. If there is a
surplus, it is considered net profit and can be added to
retained earnings or distributed to owners and
stockholders as withdrawals or dividends. When
expenses exceed net sales (when a loss occurs), it is
charged against net worth and a reduction in the
owners' equity occurs and is shown on the balance
sheet.
Income Statement - Dividends/Withdrawals
This item can be very important, depending on the
type of business you are reviewing - corporation,
partnership or proprietorship. In the case of a
partnership or proprietorship, this figure would
represent withdrawals by the owners of the business.
When withdrawals or dividends exceed profits they
diminish net worth. This situation may have an
adverse effect on the financial stability of the business.
Working Capital
Working capital represents the funds available to
finance current business operations. Many companies
show this computation prominently in their statement,
but in some instances you may want to compute it on
your own. This figure is important, as it is used to
determine how much excess cash a business has to
fund current expenses. Working capital is the
difference between current assets and current
liabilities. Since a company's sources to pay its current
debt come partly from current assets, a business with
a comfortable margin should be able to pay its bills
and operate successfully. How much working captial is
enough depends on the proportion of current assets
to current liabilities rather than on the dollar amount of
working capital. We'll take up this ratio shortly;
however keep in mind that it is good to have two
dollars or more of current assets to one dollar of
current liabilities than to have less, for most
businesses.
Analyzing The Financial Statement
Previously, we indicated that financial statements are
prepared so management can make informed,
intelligent decisions affecting the success or failure of
its operations. In the business world, outsiders -
creditors, bankers, lenders, investors and
shareholders - have varying objectives in mind when
they look at a company's statements. The type of
analysis and the amount of time spent on it depends
upon the objectives of the analyst. An investor
interested in a publicly owned company might spend
less effort than a banker considering a loan
application. A supplier considering an order from a
small business might spend less time and effort than
the banker. The degree of information available on a
business varies according to the requirements of the
business under review. For example, a banker
considering a sizable loan application would normally
require not only a detailed statement of condition and
income for several years, but inventory breakdowns
and aging schedules of receivables, accounts
payable, sales plans and profitability projections.
When a banker, credit manager or investor receives
the financial information desired, an analysis is started
and the leading tool most analysts use is ratio analysis.
Ratios are a means of highlighting relationships
between financial statement items. There are literally
dozens of ratios which can be complied on any
business. Generally, ratios are used in two ways: for
internal analysis of items in a balance sheet; and/or
for comparative analysis of a company's ratios at
different time periods and in comparison to other firms
in the same industry.
Below find fourteen key business ratios. The ratios are
divided into three groups:
Solvency Ratios - used to measure the financial
soundness of a business and how well the company
can satisfy its obligations.
Efficiency Ratios - used to measure the quality of the
firm's receivables and how efficiently it utilizes its other
assets.
Profitability Ratios - used to measure how well a
company performs.
Solvency Ratios - Quick Ratio
The quick ratio, sometimes called the "acid test" or
"liquid" ratio measures the extent to which a business
can cover its current liabilities with those current
assets readily convertible to cash. Only cash and
accounts receivable would be included, as inventory
and other current assets would require time and effort
to convert into cash. A minimum ratio of 1.0 to 1.0 ($1
of cash receivables to $1 current liabilities) is
desirable.
Solvency Ratios - Current Ratio
The current ratio expresses the working capital
relationship of current assets to cover current
liabilities. A rule of thumb is that at least 2 to 1 is
considered a sign of sound financial strength.
However, much depends on the standards of the
specific industry you are reviewing.
Solvency Ratios - Current Liabilities to Net Worth
Current liabilities to net worth ratio indicates the
amount due creditor within a year as percentage of
the owners or stockholders investment. The smaller
the net worth and the larger the liabilities, the less
security for creditors. Normally a business starts to
have trouble when this relationship exceeds 80
percent.
Solvency Ratios - Current Liabilities to Inventory
Current liabilities to inventory ratio shows you, as a
percentage, the reliance on available inventory for
payment of debt (how much a company relies on funds
from disposal of unsold inventories to meet its current
debt).
Solvency Ratios - Total Liabilities to Net Worth
Total liabilities to net worth shows how all of the
company's debt relates to the equity of the owners or
stockholders. The higher this ratio, the less protection
there is for the creditors of the business.
Solvency Ratios- Fixed Assets to Net Worth
Fixed assets to net worth ratio shows the percentage
of assets centered in fixed assets compared to total
equity. Generally the higher this percentage is over 75
percent, the more vulnerable a concern becomes to
unexpected hazards and business climate changes.
Capital is frozen in the form of machinery and the
margin for operating funds becomes too narrow for
day to day operations.
Efficiency Ratios - Collection Period
Collection period ratio is helpful in analyzing the
collectability of accounts receivable, or how fast a
business can increase its cash supply. Although
businesses establish credit terms, they are not always
observed by their customers for one reason or
another. In analyzing a business, you must know the
credit terms it offers before determining the quality of
its receivables. While each industry has its own
average collection period (number of days it takes to
collect payments from customers), there are observers
who feel that more than 10 to 15 days over terms
should be of concern.
Efficiency Ratios - Sales to Inventory
Sales to inventory ratio provides a yardstick for
comparing stock-to-sales ratios of a business with
others in the same industry. When this ratio is high, it
may indicate a situation where sales are being lost
because a concern is understocked and/ or customers
are buying else where. If the ratio is too low, this may
show that inventories are obsolete or stagnant.
Efficiency Ratios - Assets to Sales
Assets to sales ratio measures the percentage of
investment in assets that is required to generate the
current annual sales level. If the percentage is
abnormally high, it indicates that a business is not
being aggressive enough in its sales efforts, or that its
assets are not being fully utilized. A low ratio may
indicate a business is selling more than can be safely
covered by its assets.
Efficiency Ratios - Sales to Net Working Capital
Sales to net working capital ratio measures the
number of times working capital turns over annually in
relation to net sales. A high turn over can indicate
over trading (an excessive sales volume in relation to
the investment in the business). This ratio should be
reviewed in conjunction with the assets to sales ratio.
A high turnover rate might also indicate that the
business relies extensively upon credit granted by
suppliers or the bank as a substitute for an adequate
margin of operating funds.
Efficiency Ratios - Accounts Payable to Sales
Accounts payable to sales ratio measure how the
company pay its suppliers in relation to the sales
volume being transacted. A low percentage would
indicate a healthy ratio.
Profitability Ratios - Return on Sales (Profit
Margin)
Return on sales (profit margin) ratio measures the
profits after taxes on the year's sales. The higher this
ratio, the better the prepared the business is to handle
downtrends brought on by adverse conditions.
Profit Ratios - Return on Assets
Return on assets ratio is the key indicator of the
profitability of a company. It matches net profits after
taxes with the assets used to earn such profits. A high
percentage rate will tell you the company is well run
and has a healthy return on assets.
Profitability Ratios - Return on Net Worth (Return
on Equity)
Return on net worth ratio measures the ability of a
company's management to realize an adequate return
on the capital invested by the stockholders/owners of
the company.

CreditManagementWorld.com

International Trade Glossary of Terms

Abusive Draw - Drawing on a standby letter of credit when no violation of the
underlying contract has occurred.
Acceptance - Acceptance constitutes an unconditional obligation on the part of
the accepting party to pay the draft at maturity. A draft accepted by a bank is
called a "banker’s acceptance" whereas one accepted by a company is called a
"trade acceptance."
Account Party - Party for whom a letter of credit is opened. "Account party" and
"applicant" are the same, but sometimes one party will agree with the issuing bank
to make all payments under a letter of credit showing the name of another party
(as in the case of affiliated companies). Banks may refer to one of these parties as
the applicant and the other as the account party.
Advance Payment - Payment made by the buyer to the seller prior to shipment.
It is customary to only pay an agreed percentage of the value of the goods with
the remainder paid after shipment.
Advance Payment Bond - Bond, guarantee, or standby letter of credit given by a
seller receiving an advance payment (or contract) to the buyer to assure that the
funds will be returned if goods are never shipped or the services are not
performed.
Advising Bank - Bank that receives a letter of credit from the issuing bank for
authentication and delivery to the beneficiary. The advising bank is usually a
correspondent of the issuing bank located in the same country as the beneficiary.
Airway Bill - Document signed by an airline to show receipt of goods for air
transportation from and to the airports indicated.
Ancillary Guarantee - Type of guarantee where the guarantor joins with one of
the parties to the contract and agrees to fulfill that party’s obligations if necessary,
effectively co-signing the contract. (Sometimes referred to as a "Bank Guarantee"
in foreign countries.) As opposed to an independent or demand guarantee, under
an ancillary guarantee the guarantor also acquires rights under the contract and
may resort to terms in the contract to dispute claims against the guarantee. Also
called a "contract guarantee." It should be noted that banks in the USA are
generally prohibited by law from issuing ancillary guarantees, banks in other
countries are not. US banks instead issue demand guarantees or standby letters of
credit.
Applicant - Party requesting that a letter of credit be opened.
Approval, Documents Sent on - Treatment of letter of credit documents
wherein the negotiating bank does not certify that the documents meet the
requirements of the L/C, but rather forwards the documents to the issuing bank
with a request that it examine the documents, obtain waiver of any discrepancies,
and pay, or, in the case of time drafts, accept the drafts, if drawn on them, or
authorize acceptance by the paying/drawee bank.
Assignment of Proceeds - Legal mechanism by which the beneficiary of a letter
of credit may pledge the proceeds of future drawings to a third party. Assigning
proceeds involves giving the letter of credit to a bank, which will hold the L/C
until drawn upon, along with irrevocable instructions to the bank to disburse
proceeds, when generated, in a specified way, (such as, "pay 50% of each
drawing to Acme Corporation.") The bank will acknowledge the assignment to the
assignee but has no obligation actually to pay any funds to the assignee unless the
L/C is drawn upon by the beneficiary and payment is received from the issuing or
confirming bank. An assignment of proceeds is not an assignment or transfer of
the letter of credit and the assignee acquires no rights to perform under the L/C in
order to generate funds.
Authority to pay - See "cable for authority to pay."
Aval - Guarantee added by a bank to an accepted time draft by endorsing the
front of the draft "per aval." The avalizing bank becomes obligated to pay the draft
at maturity if the drawee/acceptor fails to do so.
Avalized Draft - Trade acceptance to which an aval has been added.
B/A - Abbreviation for "banker’s acceptance."
B/L - Abbreviation for "bill of lading."
Banker’s acceptance - Time draft that has been drawn on and accepted by a
bank. In a large and active market, investors buy and sell bankers’ acceptances at
rates similar to, and often below, LIBOR. Rates are low due to the low risk of
default on the part of a bank and the fact that there is generally an underlying
trade transaction, the proceeds of which are pledged to cover the acceptance
when it matures.
Beneficiary - Party in whose favor a letter of credit is issued, who is entitled to
present documents required by the L/C and receive payment.
Bid Bond - Bond, guarantee, or standby letter of credit that accompanies a bid,
issued for an amount that will be forfeited if the bidder wins the bid but then
reneges.
Bill of Exchange - A draft.
Bill of Lading - Document signed by a transportation company (carrier) to show
receipt of goods for transportation from and to the points indicated. Although US
law recognizes such a thing as a non-negotiable bill of lading, international law
distinguishes bills of lading from waybills in that a bill of lading is a title document issued to order of a "consignee," who can then transfer title (legal ownership of the goods) by endorsement and delivery ("negotiation") of the bill of lading.
Someone must present the bill of lading at the point of delivery in order to claim
the goods. A waybill is not negotiable in this way and the transportation company
will simply deliver the goods to the consignee. A transport document issued
"consigned to order of..." is a negotiable bill of lading; one issued simply
"consigned to..." is a nonnegotiable waybill. See also "multimodal bill of lading,"
"ocean bill of lading," "port-to-port bill of lading."
Bond - See specific types: "advance payment bond," "bid bond," "performance
bond."
C&F - Abbreviation for "cost and freight (...named port of destination)." Also
CFR.
CAD - Abbreviation for "cash against documents."
CFR - Abbreviation for "cost and freight (Named port of destination)." Also C&F.
CIF - Abbreviation for "cost, insurance, and freight (Named port of destination)."
CIP - Abbreviation for "carriage and insurance paid to (Named place of
destination)."
CPT - Abbreviation for "carriage paid to (Named place of destination)."
Cable for Authority to Pay - Request for permission to pay a letter of credit
drawing despite discrepancies, sent electronically by the negotiating bank to the
issuing bank.
Carriage and Insurance Paid to (Named place of destination) - Shipping term
included in a contract of sale (abbreviated as CIP) meaning that the seller agrees
to arrange and pay for transportation and cargo insurance over the goods to the
named destination, such costs being included in the price of the goods.
Nonetheless, all risk of loss of or damage to the goods, as well as any additional
costs due to events occurring after the time the goods have been delivered to the
carrier, is transferred from the seller to the buyer when the goods have been
delivered into the custody of the carrier.
Carriage Paid to (Named place of destination) - Shipping term included in a
contract of sale (abbreviated as CPT) meaning that the seller agrees to arrange
and pay for transportation of the goods to the named destination, such costs being
included in the price of the goods. Nonetheless, all risk of loss of or damage to
the goods, as well as any additional costs due to events occurring after the time
the goods have been delivered to the carrier, is transferred from the seller to the
buyer when the goods have been delivered into the custody of the carrier, at
which point the buyer must arrange for cargo insurance if so desired.
Carrier - Any person who, in a contract of transportation, undertakes to
perform, or to procure at his own responsibility the performance of,
transportation by rail, road, sea, air, inland waterway or by a combination of such
modes. See "multimodal bill of lading" for further discussion.
Case-of-Need - An agent of the exporter located in the country of the importer
who is to be notified by the presenting bank under a draft collection of any
difficulties in collecting payment. The case-of-need may be given the power to
change the collection instructions or even the draft amount, or may just be
expected to make arrangements to store the goods and locate an alternate buyer.
Whatever authority the case-of-need has should be specified in the collection
instructions letter.
Cash Against Documents - Term (abbreviated as CAD) for documentary
collection instructions requesting the presenting bank to deliver documents only
upon receipt of payment from the drawee/importer. (The same as, "documents
against payment.")
Certificate of Origin - Document that is required in certain countries. It is a
signed statement as to the origin of the export item. Certificates of origin are
usually signed through an official organization, such as a local chamber of
commerce, or can simply be a statement signed by the manufacturer or exporter
as to the source of the goods.
Clean Bill of Lading - Bill of lading that bears no clause or notation which
expressly declares a defective condition of the goods and/or the packaging.
Clean Draft - Draft which is not accompanied by documents.
Clean letter of credit - Letter of credit that calls for presentation of nothing
more than a draft to trigger payment. This term is sometimes used incorrectly to
mean "standby letter of credit with all documents presented correctly".
Collecting Bank - Any bank other than the remitting bank involved in the
collection of a draft and/or documents.
Combined transport - See "multimodal bill of lading."
Commercial Invoice - A bill for the goods from the seller to the buyer. These
invoices may be used by governments to determine the true value of goods when
assessing customs duties.
Commercial Letter of Credit - Letter of credit intended to act as the vehicle of
payment for goods sold by one party to another.
Commercial Risk - Risk that the buyer of goods cannot or will not pay the seller
when payment is due.
Confirmed Letter of Credit - Letter of credit to which the advising bank has
added its own, independent undertaking to honor presentation of the required
documents, i.e., pay the beneficiary at sight or at maturity, as specified by the
L/C. See also "silent confirmation."
Confirming Bank - Bank that has added its confirmation to a letter of credit.
This term is also sometimes used loosely to refer to a bank that has issued a
commitment to purchase letter of credit documents without recourse, a practice
called "silent confirmation."
Consignee - Party into whose possession goods are to be delivered.
Consignment - Term of sale wherein a seller delivers goods to the buyer but
retains legal ownership of the goods until they are re-sold by the buyer. The buyer
is responsible for remitting payment to the seller at time of re-sale.
Consular Invoice - A document that is required in some countries. It describes
the shipment of goods and shows information such as the buyer and seller, and
value of the shipment. Certified by the consular official of the foreign country
stationed in the USA, it is used by the country's customs officials to verify the
value, quantity, and nature of the shipment.
Contract Guarantee - See "ancillary guarantee."
Contract Risk - Risk that the buyer of goods will renege on the contract (as
opposed to simply being unable to pay).
Cost and Freight (Named port of destination) - Shipping term included in a
contract of sale (abbreviated as CFR or C&F) meaning that the seller agrees to
take full responsibility for delivering the goods to the port of loading, clear the
goods for export, and arrange and pay for transportation of the goods to the
named port of discharge, such costs being included in the price of the goods.
Nonetheless, all risk of loss of or damage to the goods, as well as any additional
costs due to events occurring after the time the goods have been delivered on
board the vessel, is transferred from the seller to the buyer when the goods pass
the ship’s rail at the port of loading. It is up to the buyer to arrange marine
insurance for the ocean voyage and transportation from the port of discharge.
Cost, Insurance and Freight (Named port of destination) - Shipping term
included in a contract of sale (abbreviated as CIF) meaning that the seller agrees
to take full responsibility for delivering the goods to the port of loading, clear the goods for export, and arrange and pay for transportation and marine insurance
over the goods to the named port of discharge, such costs being included in the
price of the goods. Nonetheless, all risk of loss or damage to the goods, as well as
any additional costs due to events occurring after the time the goods have been
delivered on board the vessel, is transferred from the seller to the buyer when the
goods pass the ship’s rail at the port of loading. It is up to the buyer to arrange
transportation from the port of discharge.
Country Risk - Risk incurred by a seller of goods that a buyer in a different
country will not be able to pay for the goods due to political or economic
conditions in his country. The two components of country risk are "political risk"
and "transfer risk."
Credit Insurance - Insurance against losses due to inability or failure of
customers to pay. There is usually a high deductible amount involved before the
insurance will pay.
Credit Risk - Risk incurred by a seller of goods that the buyer cannot or will not
pay for them. See also "commercial risk," "contract risk," "financing risk,"
"political risk," "transfer risk."
Cumulative Revolving Letter of Credit - Revolving letter of credit that permits
the seller to carry over any amounts not drawn into successive periods.
D/A - Abbreviation for "documents against acceptance."
D/P - Abbreviation for "documents against payment."
Days of Grace -The number of days the acceptor of a draft may go past due
before being judged in default and triggering any guarantor to pay on the acceptor’
s behalf. When an avalized draft is sold to a forfaiter, the forfaiter will impute the days of grace into the financing period.
Deferred Payment - Payment a set time after shipment or presentation of
shipping documents, as opposed to immediately or "at sight." A distinction is
drawn between a letter of credit that is available for deferred payment and one
that is available for acceptance of time drafts in that no drafts are involved under a deferred payment L/C. Without accepted drafts, the beneficiary’s ability to sell, or "discount," his right to payment to another lender or investor is restricted.
Deferred Reimbursement - Arrangement under a letter of credit where the
issuing bank agrees up front with its customer, the applicant, to pay the
beneficiary upon presentation of the documents required in the L/C but to defer
charging the applicant until a later date, thereby financing the purchase of goods
under the L/C, usually for the expected amount of time the applicant needs in
order to re-sell the goods.
Demand Guarantee - Type of guarantee that is payable immediately upon
presentation of documents specified, without regard to the validity of the
documents or compliance with the underlying contract, as opposed to an
"ancillary guarantee." Also called an "independent guarantee." Although there are
separate rules of practice for demand guarantees and letters of credit, they are
both considered letters of credit under US law.
Destination Control Statement - This item appears on the commercial invoice,
and ocean or air waybill of lading to notify the carrier and all parties that the item can be exported only to certain destinations.
Direct Collection - Service for handling export draft collections in which the
exporter’s bank provides the forms that bear the bank’s own letterhead for
mailing documents to the buyer’s bank for collection. To the buyer’s bank, it will
appear that the documents were sent from the exporter’s bank, but time and
expense can be saved by bypassing unnecessary processing at the exporter’s
bank.
Discrepancies - Term used to describe deviations between documents presented
and requirements set in the letter of credit or inconsistencies among the documents themselves.
Dishonor - Failure or refusal by the drawee/payer to accept a draft presented for
acceptance or to pay a draft presented for payment.
Documentary Credit - Synonymous with "letter of credit."
Documentary Draft Collection - Process for collecting payment in a sale of
goods wherein a legal demand for payment from the buyer is made by a bank
acting as collecting agent for the seller. Demand is made by presenting a draft.
The collecting bank is also entrusted with documents to deliver in accordance
with accompanying instructions, usually once the draft is either paid or accepted.
These documents are generally needed by the buyer to show title to the goods
before they will be released by a freight forwarder and customs.
Documentary Letter of Credit - Another way to refer to commercial letters of
credit.
Documents Against Acceptance - Term for documentary draft collection
instructions requesting the presenting bank to deliver documents only upon
acceptance of the draft by the drawee/importer. See also "acceptance."
Documents Against Payment
Term for documentary collection instructions requesting the presenting bank to
deliver documents only upon receipt of payment from the drawee/importer.
Synonymous with "cash against documents."
Draft - Written demand for payment of a specified amount addressed to a named
party, called the "drawee," and signed by the "drawer." A draft may demand
payment immediately upon presentation ("at sight") or on a specified maturity date
and must also specify a party to be paid (the "payee"). Most drafts are
"negotiable," meaning the payee’s right to payment can be transferred by the
payee to another party by endorsement and delivery of the draft.
Draft Collection - Process for collecting payment in a sale of goods wherein a
legal demand for payment from the buyer is made by a bank acting as collecting
agent for the seller. Demand is made by presenting a draft. See also "draft" and
"documentary draft collection."
Drawee - Party to whom a draft is addressed and from whom payment is
demanded, or, in a documentary collection with no draft, party from whom
payment is requested in exchange for delivery of documents.
EMC - Abbreviation for "export management consultant."
ETC - Abbreviation for "export trading company."
EXW - Abbreviation for "ex works (Named place)."
Evergreen Letter of Credit - Letter of credit with an initial expiration date but
containing a clause that states that it will be automatically extended for additional periods unless the issuing bank provides notice to the beneficiary stating otherwise.
Ex Factory - Synonymous with "ex works."
Ex Works (Named place)
Shipping term included in a contract of sale (abbreviated as EXW) meaning that
the seller fulfills his obligation to deliver when he has made the goods available at his premises (i.e., works, factory, warehouse, etc.) to the buyer. In particular, he is not responsible for loading the goods for export, unless otherwise agreed. The
buyer bears all costs and risks involved in taking the goods from the seller’s
premises to the desired destination.
Expiry Date - Last date on which documents may be presented or corrected in
order to comply with a letter of credit. Presentation must be made to the bank
indicated in the L/C.
Export Letter of Credit - Term used by an exporter to describe a commercial
letter of credit in his favor or by a bank to describe a letter of credit issued by a bank other than itself. The same L/C will be called an "import letter of credit" by the importer/butyer and the issuing bank.
FCA - Abbreviation for "free carrier (Named place)."
FCR - Abbreviation for "forwarder’s cargo receipt."
FOB - Abbreviation for "free on board (Named port of shipment)."
Factoring - Service of assuming the credit risk of another party’s sales, generally
including collecting payment when due. Factors often provide or arrange limited-
recourse financing against the accounts receivable they are guaranteeing, referred
to as "purchasing receivables."
Fed Funds Rate - Interest rate at which banks in the United States lend each
other dollars for next-day repayment ("overnight loans").
Financing Risk - Term used to describe the increasing uncertainty that the buyer
of goods will have the capacity to pay when payment is due the longer the time
period he is given to make payment.
Forfait - Purchase of negotiable instruments, most often avalized drafts, without
recourse. The forfaiter assumes the credit risk of being able to collect payment
when due.
Forwarder’s Cargo Receipt - Document issued by a freight forwarder or freight
consolidator indicating goods have been received from the seller and are being
held on behalf of the buyer. Goods are generally received in the seller’s country
and the forwarder/consolidator will arrange shipment to the buyer according to
the buyer’s instructions.
Free Carrier (Named place) - Shipping term included in a contract of sale
(abbreviated as FCA) meaning that the seller fulfills his obligation to deliver when
he has handed over the goods, cleared for export, into the charge of the carrier,
freight consolidator, or freight forwarder named by the buyer at the named place
or point.
Free on Board (Named port of shipment) - Shipping term included in a
contract of sale (abbreviated as FOB) meaning that the seller fulfills his obligation to deliver when the goods have passed over the ship’s rail at the named port of shipment, all costs of inland transportation and loading being included in the price of the goods. The buyer has to bear all costs and risks of loss of or damage to the goods from that point.
Freely Negotiable Letter of Credit - Letter of credit that indicates it is "available with any bank by negotiation." By including this wording, the issuing bank authorizes the beneficiary to present documents to the bank of his choice for
examination and collection of payment.
Freight Forwarder - Company that, as an agent for the shipper, arranges
transportation for goods. Many freight forwarders offer additional services such
as preparing export documentation, arranging for goods to be packed into
shipping containers, arranging for goods to clear customs, etc.
Full Set - All signed originals of a document. For example, bills of lading are
often issued in three originals, all having the same validity for claiming goods at
the place of delivery.
Grace Period - See "days of grace."
Import Letter of Credit - Term used by an importer to describe a commercial
letter of credit he has asked a bank to issue or by a bank to describe a letter of
credit it has issued. The same L/C will be called an "export letter of credit" by the exporter.
Independent Guarantee - See "demand guarantee."
Inspection Certificate - A document that is required by some purchasers and
countries in order to attest to the specifications of the goods shipped. This is
usually performed by an independent third party that will inspect the goods for
conformity.
Installment Letter of Credit - Letter of credit calling for multiple shipments
within specified date ranges.
Insurance - see "credit insurance" and "marine cargo insurance."
Irrevocable Letter of Credit - Letter of credit that cannot be amended or
canceled without agreement of both the beneficiary and the issuing bank. Any
letter of credit subject to the UCP500 or to US law is irrevocable unless it
specifies otherwise.
Issuing Bank - Bank that has issued a letter of credit. The issuing bank is
obligated to pay if documents are presented that comply with the L/C
requirements.
Letter of Credit - A letter on the part of a bank and at the request of one of the
bank’s customers, to pay a named beneficiary a specified amount of money (or to
deliver an item of value) if the beneficiary presents documents in accordance with
the terms and conditions specified in the letter of credit.
Letter of Guarantee - Undertaking, usually on the part of a bank, either to fulfill
the obligations of another party (see "ancillary guarantee") or to pay a specified
amount of money upon presentation of specified documents stating that the party
being guaranteed has defaulted on certain obligations (see "demand guarantee").
One must be careful to discern which type of guarantee one is dealing with as
they both require presentation of documents but work very differently thereafter.
US law forbids banks from making guarantees, so they use letters of credit to
accomplish the same goal.
LIBOR - Acronym for the London Interbank Offered Rate. The interest rate at
which banks in London place Eurocurrency/Eurodollar deposits with each other
for specified, fixed periods of time, most commonly six months.
Marine Cargo Insurance - Insurance covering loss of or damage to goods in the
course of international transportation. The term is used for both air and land
transportation as well as ocean transportation.
Marine Bill of Lading - Synonymous with "ocean bill of lading."
Multimodal Bill of Lading - Bill of lading covering shipment of goods by more
than one means of transportation but including an ocean leg. The two major
forms of multimodal bill of lading are the combined transport bill of lading and the
through bill of lading. In a "combined transport bill of lading", the carrier signing the bill of lading (the "contractual carrier") frequently subcontracts the various legs to other carriers (the "actual carriers"), but still takes responsibility for delivery of the goods to the "place of delivery" and for any damage that might occur during carriage. In a "through bill of lading", the carrier takes responsibility for the goods only up to a specified point (still called the "place of delivery") and then passes responsibility to a second carrier for "on-carriage" to the "final destination."
Multimodal Transport - Shipment of goods by more than one means of
transportation but including an ocean leg (see "multimodal bill of lading").
Negotiable - Quality belonging to a document that enables it to transfer the
ownership of money, goods, or other items of value specified in the document by
endorsement and/or delivery of the document. Checks, drafts, promissory notes,
bonds, stock certificates, bills of lading, and warehouse receipts are examples of
documents often issued in negotiable form.
Negotiate - To "buy" documents representing ownership of money, goods, or
other items of value. The seller is also said to "negotiate to" the buyer. Unless
otherwise agreed between the buyer and seller (such as, by negotiating "without
recourse"), the seller continues to be fully responsible for the enforceability of the documents. For example, a bank that negotiates documents under a letter of credit advances funds to the presenter before submitting the documents to the issuing bank for payment.
Negotiating Bank - Bank to which letter of credit documents are presented by
the beneficiary for collection of payment. The name derives from the fact that the
negotiating bank is normally authorized by the issuing bank to negotiate
documents (see "negotiate"), but it may or may not choose actually to do so.
Furthermore, realizing that this bank may be authorized to pay or accept drafts,
rather than negotiate them, UCP500 now uses the term "nominated bank" rather
than "negotiating bank." Unless otherwise instructed, negotiating banks in North
America generally examine the documents for discrepancies before forwarding
them to the issuing bank, but this is properly viewed as a service separate from
negotiating and is not necessary when negotiating with recourse.
Non-Cumulative Revolving Letter of Credit - Revolving letter of credit that
does not permit the seller to carry over any amounts not drawn upon in previous
periods.
Notify Party - Party to be notified by the carrier of arrival of the goods at their
destination. Normally the notify party is the importer and/or the importer’s agent
for clearing goods through customs.
Ocean Bill of Lading - Bill of lading including shipment on an ocean vessel, also
called a "marine bill of lading".
Performance Bond - Bond issued at the request of one party to a contract in
favor of the other party to the contract to protect the other party against loss in
the event of default on the contract by the requesting party. The bonding agent
may undertake to fulfill the contract or may simply undertake to pay a specific
amount in monetary damages. A standby letter of credit or demand guarantee is
often used as a performance bond with the latter characteristics.
Political Risk - Risk in a sale of goods that the government in the buyer’s
country may take some action that prevents the buyer from paying. This covers
possibilities such as foreign exchange controls and nonpayment due to war or
insurrection.
Port-to-Port Bill of Lading - Bill of lading covering shipment by ocean only. The
shipper/seller is responsible for transporting the goods to the port of loading and
the buyer is responsible for picking the goods up at the port of discharge.
Multimodal, rather than port-to-port, bills of lading should generally be used for
containerized shipments and other shipments where the place of receipt and/or the
place of delivery is inland.
Pre-Export Financing - Specific form of working capital lending in which the
borrower is given funds needed to obtain or manufacture goods that have been
ordered by a buyer in another country. As such financing is normally earmarked
to individual sales, documentation of each sale must be provided to the lender,
often in the form of a letter of credit with proceeds assigned to the lender.
Presenting Bank - In a draft collection transaction, the bank that contacts the
drawee/buyer of goods, for acceptance and/or payment.
Principal - Party entrusting a draft and/or documents to a bank for collection of
payment; usually the seller of goods.
Progress Payment - One in a series of payments made at stages in the
performance of a contract. Examples would be payments made during the
various stages of construction.
Protest - In a draft collection transaction, the formal legal process of registering
that payment or acceptance of the draft has been demanded but the drawee has
refused to pay or accept the draft.Reimbursing Bank - In a letter of credit transaction, the bank with which the issuing bank maintains an account and which is authorized by the issuing bank to charge that account to pay claims received from the negotiating bank for documents that have been presented.
Remitting Bank - In a draft collection transaction, the first bank in the chain of
collection; the principal’s or seller’s bank.
Retention of Title - Legal arrangement under which a seller of goods delivers
these goods "on consignment" into someone’s custody but ownership remains
with the seller until he is paid. Retention of title allows the seller to repossess the goods whenever desired and to establish a claim against the custodian if the goods are sold or used without being paid for.
Revocable Letter of Credit - Letter of credit that can be amended or canceled at
any time without notice to or consent of the beneficiary. A letter of credit that is
subject to the UCP500 or to US law is revocable only if it clearly states this on the Revolving Letter of Credit - Letter of credit that reverts to its original amount at specified intervals, thereby preventing drawing too much in any one period. See also "cumulative revolving letter of credit" and "non-cumulative revolving letter of credit."
Shipper's Export Declaration - The SED is used to control exports and act as a
source document for official US export statistics. SEDs must be prepared for
shipments through the U.S. Postal Service when the shipment is valued over
$500. SEDs are required for shipments not using other carriers, when the value
of the commodities, classified under any single Schedule B number, is over
$2,500. SEDs must be prepared, regardless of value, for all shipments requiring
an export license or destined for countries restricted by the Export Administration
Regulations. SEDs are prepared by the exporter or the exporter's agent and
delivered to the exporting carrier (the post office, airline, or maritime company ).
The exporting carrier will present the required number of SED copies to the US
Customs Service at the port of export.
Shipper’s Indemnity - Indemnity given by the beneficiary of a letter of credit to
the negotiating bank to induce payment despite any discrepancies that may exist in
the documents.
Shipping Terms - That part of a contract between a buyer and seller that
specifies who is responsible for each aspect of shipping the good; this may
include responsibility for packing, arranging and paying for transportation and
insurance, clearing customs, and so forth.
Sight - Time of presentation, as in a draft payable "at sight" or "90 days after
sight."
Sight Draft - Draft that demands payment "at sight," or immediately, as opposed
to a time draft, which may be payable "90 days after sight" or "30 days after bill
of lading date."
Silent Confirmation - Term used for a bank’s commitment to negotiate
documents under a letter of credit without recourse at a future date. A silent
confirmation is not a confirmation in the true sense, and will not use the word
"confirm," but is rather an equivalent form of protection for the beneficiary. The
bank will require that the letter of credit be negotiable or payable by itself in order
to be able to establish holder-in-due-course rights equivalent to those of a
confirming bank.
Standby Letter of Credit - As opposed to a commercial letter of credit, a letter
of credit that does not cover the direct purchase of merchandise, so called
because it is often intended to be drawn on only when the applicant for whom it is
issued fails to perform an obligation. There is, nonetheless, a type of standby
letter of credit that is intended to be drawn on, referred to as a "direct pay letter of
credit." Standby letters of credit are based on the understanding that payment is
made against presentation of documents - usually a statement from the seller
indicating that the buyer has not paid for merchandise/invoices on the due date.
Supplier Financing - Arrangement where the seller/supplier of goods allows the
buyer an extended period of time after shipment to pay for the goods. Basically,
open credit terms.
Tenor - Time at which a draft indicates it is payable, such as, "at sight," "60 days
after the bill of lading date," or "on January 31, 2007."
Time Draft - Draft that demands payment at a specified future date rather than
immediately upon presentation.
Trade Terms - Same as "shipping terms."
Transferable Letter of Credit - Type of letter of credit that names a middleman
as beneficiary and allows him to give another party, the actual supplier, certain
rights to present documents and receive payment under the letter of credit.
Transfer must be effected by a bank authorized to do so by the issuing bank and
involves notifying the transferee (called the "second beneficiary") of what
documents he must present. The documents must be the same as those required
in the letter of credit itself but the price of the goods may be reduced and the
middleman’s name may be required to be listed in the transferee’s invoices as the
buyer, thereby allowing the middleman to substitute invoices at a higher price and
receive the difference without disclosing the name of the actual end-buyer. The
transferring bank is not obligated to pay documents presented under the transfer
- such obligation remains with the issuing bank.
UCC - Abbreviation for "Uniform Commercial Code."
UCP - Abbreviation for "Uniform Customs and Practice for Documentary
Credits." The 1993 revision is referred to as "UCP500" as it is publication number
500 of the International Chamber of Commerce.
Unconfirmed Letter of Credit - Letter of credit that has not been confirmed
(see "confirmed letter of credit").
Uniform Commercial Code - United States statute covering the rights and
obligations of the various parties involved in the purchase and sale of goods. The
UCC includes coverage of drafts and other negotiable instruments, documents of
title, transfers of funds between banks, and security interests in assets as well as
draft collections (in Article 4) and letters of credit (in Article 5).
Uniform Customs and Practice for Documentary Credits - International
standards of letter of credit practice established for bankers by the International
Chamber of Commerce. The UCP is constantly being revised to keep up with
changing practices. Although the UCP defines rights and obligations of the various
parties in a letter of credit transaction, it is not law and any given letter of credit is subject to the UCP only to the extent indicated in the letter of credit itself.
Uniform Rules for Collections - International standards of draft collection
practice established for bankers by the International Chamber of Commerce. The
Uniform Rules are not law but are more properly viewed as a handbook for banks
used to establish common understanding of terminology and expectations.
Without Recourse - Negotiation of a draft, or other negotiable instrument, or
letter of credit documents without the normal warranty on the part of the seller of
the instrument/documents that the payer named in the instrument (the "drawee,"
"payer," or "maker") will pay. Although the seller is still responsible for the
genuineness of the instrument and documents, the purchaser takes on the credit
risk of being able to collect payment from the payer when due. Unless negotiation
is without recourse, the purchaser of the instrument/documents has the right to
recover the face amount from the seller if the payer/drawee fails or refuses to pay
for any reason.

DOCUMENTARY COLLECTION

What is Documentary Collection?Documentary collection is the collection by a bank of funds due from a buyer against the delivery of documents. The bank, acting as agent for the seller (exporter), presents documents to the buyer (importer) through that party's bank and in exchange receives payment of the amount owed, or obtains acceptance of a time draft for payment at a future date.The liability of the bank under a documentary collection is primarily restricted to following the seller's instructions in forwarding and releasing documents against payment or acceptance.How is Documentary Collection different from an L/C or Open Account?Unlike a letter of the bank does not assume any liability to pay if the buyer does not want or is unable to pay. Compared to open account sales, the documentary collection offers more security to the seller, but less than a letter of credit.When should a Documentary Collection be used?Numerous criteria are applied by businesses when determining which payment instrument to offer as a term of sale. However, in general, a documentary collection would be appropriate where:1) The seller and the buyer know each other to be reliable.2) There is no doubt about the buyer's willingness or ability to pay.3) The political and economic conditions of the buyer's country are stable.4) The importer's country does not have restrictive foreign exchange controls.What are the advantages of a Documentary Collection?1) Simple and inexpensive handling compared to letters of credit.2) Often faster receipt of payment than open account terms.3) Seller retains title to the goods until payment or acceptance is made.What are the disadvantages of Documentary Collection?If the buyer refuses or is unable to pay, the seller has three options, which could be expensive:1) Find another buyer.2) Pay for return transportation3) Abandon the merchandise.Who are the parties involved?1) PRINCIPAL - exporter, seller, remitter, drawer of the draft.2) REMITTING BANK - exporter's bank handling the collection3) PRESENTING OR COLLECTING BANK - usually the buyer's bank.4) DRAWEE - importer, buyer, payee.What types of Documentary Collections are there?1) Documents against Payment (D/P) also known as "Sight Draft" or "Cash against Documents” (CAD). The buyer must pay before the collecting bank releases the title documents.2) Documents against Acceptance (D/A). The buyer accepts a time draft, promising to pay for the goods at a future date. After acceptance, the title documents are released to the buyer.What if shipment by air freight?An Air Waybill (AWB) is a straight consignment; it is not negotiable. The buyer does not need the AWB topick up the goods. In other words, the buyer can obtain the merchandise without paying for it. To avoid this possibility, when shipping by air, the AWB should always be consigned to the buyer's bank. This prevents release of the merchandise until such time as the buyer's bank issues an Air Release to the carrier. This is done only after the buyer has made payment or accepted the draft.What are the steps in documentary collection?1) The buyer (importer) and seller (exporter) agree on the terms of sale, shipping dates, etc., and that payment will be made on a documentary collection basis.2) The exporter, through a freight forwarder, arranges for the delivery of goods to the port/airport of departure.3) The forwarder delivers the goods to the point of departure and prepares the necessary documentation based on instructions received from the exporter.4) Export documents and instructions are delivered to the exporter's bank by either the exporter or the freight forwarder.5) Following the instructions of the exporter, the bank processes the documents and forwards them to the buyer's bank.6) The buyer's bank, on receipt of documents, contacts the buyer and requests payment or acceptance of the trade draft.7) After payment or acceptance of the draft, documents are released to the buyer, who utilizes them to pick up the merchandise.8) The buyer's bank remits funds to the seller's bank or advises that the draft has been accepted.9) On receipt of good funds, seller's bank credits the account of the exporter.What is the URC 522?URC 522 stands for The Uniform Rules for Collections, 1995 Revision, International Chamber of Commerce Publication No. 522, the rules that banks apply to the handling of collections.Any company importing or exporting on a documentary collection basis should be familiar with the URC 522, as it has a direct impact on how the collection is handled and what procedures the banks follow.The URC 522 may be ordered from:ICC Books USA1212 Avenue of the AmericasNew York, NY 10036Phone: 212-703-5066 212-703-5066 Fax: 212-944-0012