Banking Trade Finance 2

Question 1

What is 'factoring' in trade finance?

Accepted Answer

The sale of accounts receivable to a third party at a discount for immediate cash

Answer

Factoring involves selling outstanding invoices to a factor (financial institution) at a discount, giving the seller immediate liquidity without waiting for the buyer to pay.

Question 2

What does 'forfaiting' refer to in trade finance?

Accepted Answer

The purchase of medium- to long-term export receivables at a fixed discount on a non-recourse basis

Answer

Forfaiting is when an exporter sells its medium-to-long-term receivables (typically bills of exchange or promissory notes) to a forfaiter at a discount without recourse, eliminating credit risk.

Question 3

In Incoterms, what does 'CIF' (Cost, Insurance, and Freight) mean?

Accepted Answer

The seller pays for shipping and insurance to the destination port; risk transfers when goods are loaded onto the vessel

Answer

Under CIF, the seller arranges and pays for freight and insurance to the named destination port, but risk transfers to the buyer once goods are loaded on the ship at the origin port.

Question 4

What is a 'Standby Letter of Credit' (SBLC)?

Accepted Answer

A payment guarantee that is drawn upon only if the buyer defaults on a contractual obligation

Answer

A Standby LC is a bank guarantee of last resort — it is only drawn on if the buyer fails to fulfill their contractual obligations, making it a contingent payment instrument.

Question 5

What is 'supply chain finance' (reverse factoring)?

Accepted Answer

A program where a buyer's bank pays suppliers early at a discounted rate based on the buyer's credit rating

Answer

In reverse factoring, a buyer arranges for a bank to pay its suppliers early — at a lower rate based on the buyer's strong credit — while the buyer repays the bank on the normal due date.

Banking Practice Test

Banking Practice Test

Banking Trade Finance 2