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Retention bond A facility, normally issued by a bank that protects buyers against the risk that a
plant or other expensive capital good will fail to meet full contractual
specifications. If this happens, the bonds can be called by the buyer or holder of
the bonds. They are an alternative to retention payments, in which the buyer
withholds part of the contract price until the plant or other capital good has been
in full working order for the contractually agreed period. Export credit agencies
can provide cover against the unfair calling of these bonds for political reasons,
or the failure of the buyer to make retention payments when due, unless such
failure is in accordance with the buyer's contractual rights.
Short-term
business, short-
term credit
Transactions involving a maximum credit period of, usually, 180 days, although
under some definitions it can extend to 360 days and, in exceptional cases, to
two years. For purposes of the OECD Arrangement, the medium term begins
(and, by implication, the short term ends) at two years. Short-term business
represents the bulk of the business of most export credit agencies and normally
includes transactions in raw materials, commodities, and consumer goods. There
is no universally accepted dividing line between short-term and medium-term
credit.
Specific cover,
specific policy
Insurance underwritten by an export credit agency for a single contract,
transaction, or project. Specific cover is normally written for medium- and long-
term business, whereas in short-term business most export credit agencies issue
framework or comprehensive policies covering the whole range of an exporter's
business or an agreed portion thereof.
Stand-by letter
of credit
A letter of credit that provides for payment by a bank (the opening bank or
issuing bank) to a beneficiary only in the event that the circumstances set out in
the letter of credit come to pass at some future date. Such letters are often issued
by banks in one country to beneficiaries in another and could, for example, be
activated in the event of breach of contract by an exporter. Stand-by letters of
credit are often used in international trade in lieu of a performance bond or
performance guarantee. They are also covered by the International Chamber of
Commerce's Uniform Customs and Practices Guidelines.
Supplier credit Credit extended by an exporter (supplier) to an overseas buyer as part of the
export contract. Cover for this transaction may be extended by the export credit
agency to the exporter. Such arrangements are much more common in short-
term business. When they arise in the area of medium-term credit, the buyer
normally makes a cash down payment (up to 15 percent) and then accepts bills
of exchange or issues promissory notes for the balance, at some stage before
final delivery or acceptance of the goods. See also buyer credit.
Surety bond Normally, a bond that gives an assurance to a buyer that a contract or project
will be successfully completed either by the exporter or contractor itself or by
someone else. These bonds are issued by specialist surety companies rather than
by banks and are not to be confused with demand bonds.
Trade finance A catch-all term applied essentially to the whole area of short-term business,
especially that involving finance provided directly by banks issuing letters of
credit.