Transaction Illustrations

As a quick reference, we provide below a couple of transaction illustrations to provide a flavour for the types of transactions we can assist with, and their relative position on a notional risk continuum.

Basic Trade Finance Products

The graphic below shows the different types of core trade finance products available, and positions each in terms of transaction risk, from the Importer’s and from the Exporter’s perspective.When reviewing your needs, we may determine that it makes sense (or is necessary) for you to accept all the risk and agree, for example, to make payment prior to receipt of items purchased.

Documentary Collection

The key feature of this type of instrument is that banks involved will act on behalf of Importers and Exporters, to arrange for an exchange of shipping documents (which typically include documents of title to the goods) against the agreed payment.

Collections do not involve a verification process, other than to ensure that the required documents have been provided by the Exporter, and therefore, provide limited security. A Documentary Collection transaction looks as follows:

Letter of Credit (L/C)

Anotherkey product is the Letter of Credit (L/C), which is an instrument which promises payment to the Beneficiary (Exporter) by the Issuing Bank, against shipping documents presented in conformity with the terms of the L/C. A L/C can be issued with a variety of useful and value-added features, including the option to "Confirm" a Letter of Credit.

A L/C offers excellent security to Importers and Exporters, since it, like a Documentary Collection, involves an exchange of payment for shipping documents. The critical difference is that under a L/C, the banks involved are obligated to verify the documents carefully to ensure that they are in full conformity with the terms specified in the L/C, and then to make payment in accordance with the instructions provided in the L/C. A L/C allows for the stipulation of a wide variety of important details such as payment and shipping terms, latest shipping date, and amount and nature of insurance on the cargo to name a few.

A Confirmed L/C is especially useful (in some cases indispensable) in high-risk markets or with high-risk trading relationships, in that it allows the Exporter to obtain a further, independent payment undertaking, when the payment promise of the Issuing Bank does not inspire full confidence. This may arise if there is any question as to the Issuing Bank’s ability to pay which might be restricted by events such as economic crisis, military action or exchange control regulations.

A basic L/C transaction occurs as follows.

While there are a variety of transactions that could be illustrated, our purpose here is to offer an introductory flavour for the nature of core Trade Finance products offered by the TD GTF Team. Documentary Collections and Letters of Credit can, depending on the specifics of a given transaction, serve as the basis to facilitate payment between Importers and Exporters, provide financing to the party in need, and/or offer risk mitigation solutions as needed.

Receivables Monetization

The final transactional illustration concerns Receivables Monetization.The TD GTF Receivables Monetization Program, offered to qualified clients, involves a powerful and effective financing solution based upon the existences of open account receivables. It involves a financing mechanism which is not visible to our client’s trading partner, and which secures GTF from loss, either through third-party risk insurance (either a government "ECA" – export credit agency, or a private sector insurer), or through recourse to the borrower, our TD client.

An overview of a Receivables Monetization transaction looks as follows:

Standby L/Cs and Guarantees

Standby L/Cs and Guarantees, which are similar instruments, are issued at the request of an Applicant, in favour of a Beneficiary. Typically, these instruments are issued on a contingency basis only and are not intended to be drawn, however, their value is in the security of an independent payment promise, often triggered by a simple demand from the Beneficiary.

Standby L/Cs are subject to UCP 500, while guarantees are subject to the laws of the country in which they are issued. Bid Bonds, Advanced Payment, Warranty and Performance Bonds are special instances or types of Guarantees.