Trade Finance Glossary: 75 Terms Every Manufacturer Should Know
May 18, 2026
Trade Finance Glossary: 75 Terms Every Manufacturer Should Know
Trade finance has its own dialect — part banking, part logistics, part legal. For US manufacturers reshoring production from China to Mexico, the vocabulary matters in ways it didn't a decade ago. The difference between advance rate and advance payment, or between factoring and reverse factoring, can determine whether a nearshoring program funds itself or stalls out waiting for cash to clear.
We at Reshore built this glossary for the procurement leader, CFO, treasurer, or operations head who is suddenly fluent in tooling transfers and HTS codes but needs to brush up on the financing instruments that make cross-border manufacturing actually work. The 75 terms below cover the full stack: documentary trade finance, supply chain finance, embedded B2B payments, factoring, and the specific cross-border mechanics relevant to US-Mexico USMCA trade.
How to Use This Glossary
Terms are grouped by category so you can scan within a domain — letters of credit, factoring, supply chain finance, cross-border specifics, and embedded finance. If you're looking for a deeper conceptual treatment, our companion piece, a walkthrough of modern trade finance instruments, walks through how these pieces fit together in a real reshoring deal.
Documentary Trade Finance
1. Letter of Credit (LC)
A bank-issued commitment to pay a seller upon presentation of compliant shipping and trade documents. The classic instrument for cross-border trade where buyer and seller don't yet trust each other.
2. Documentary Collection
A bank-mediated payment arrangement where the seller's bank forwards shipping documents to the buyer's bank, which releases them upon payment (D/P) or acceptance (D/A). Cheaper than an LC, less protective.
3. Sight LC
A letter of credit payable immediately when compliant documents are presented.
4. Usance LC (Time LC)
A letter of credit payable at a specified future date — typically 30, 60, 90, or 180 days after presentation or shipment.
5. Standby Letter of Credit (SBLC)
A backup payment guarantee that only pays out if the buyer defaults. Functions more like a guarantee than a primary payment method.
6. Confirmed LC
An LC where a second bank (usually in the seller's country) adds its own payment guarantee, mitigating issuing-bank or country risk.
7. Transferable LC
An LC that allows the original beneficiary to transfer all or part of the credit to a secondary beneficiary — useful for trading companies or intermediaries.
8. Back-to-Back LC
Two separate LCs used in tandem: the buyer's LC to the intermediary serves as collateral for the intermediary's LC to the actual supplier.
9. Red Clause LC
An LC that permits the seller to draw an advance before shipping, against future presentation of documents.
10. Documentary Credit
The formal banking name for a letter of credit, governed by ICC's UCP 600 rules.
11. UCP 600
The Uniform Customs and Practice for Documentary Credits, the ICC ruleset governing letters of credit worldwide.
12. Bill of Lading (B/L)
A document issued by the carrier acknowledging receipt of cargo, serving as title to the goods in international shipping.
13. Bill of Exchange / Draft
A written order from one party demanding payment from another, often used alongside documentary collections.
14. Discrepancy
Any inconsistency between the documents presented under an LC and the LC's terms — a leading cause of payment delays.
15. Negotiation
When a bank purchases or advances against documents presented under an LC, before the issuing bank reimburses.
Factoring and Receivables Finance
16. Factoring
The sale of accounts receivable (invoices) to a third party (the factor) at a discount in exchange for immediate cash.
17. Recourse Factoring
Factoring where the seller remains liable if the customer fails to pay the invoice.
18. Non-Recourse Factoring
Factoring where the factor absorbs the credit risk of customer non-payment.
19. Invoice Factoring
The sale of specific commercial invoices for immediate liquidity — typically used by suppliers to accelerate cash from slow-paying buyers.
20. Invoice Discounting
A confidential form of receivables finance where the seller retains collection responsibility and the customer is unaware of the financing arrangement.
21. Advance Rate
The percentage of invoice face value that a factor advances upfront — typically 75–90%, with the remainder (less fees) released upon customer payment. To model how this affects effective cost, our side-by-side rate comparison tool lets you benchmark LC, factoring, and SCF pricing.
22. Reserve
The portion of an invoice held back by the factor until the customer pays.
23. Factoring Fee (Discount Fee)
The factor's charge, usually expressed as a percentage of invoice value, sometimes tiered by aging.
24. Spot Factoring
Factoring a single invoice or selected invoices rather than committing an entire ledger.
25. Whole Turnover Factoring
A facility under which the seller factors all qualifying invoices, not just selected ones.
26. Notification Factoring
Factoring where the customer is notified that payment should be made directly to the factor.
27. Aging Schedule
A breakdown of receivables by how long they've been outstanding — central to underwriting any factoring facility.
28. Dilution
The percentage of receivables that don't get collected at full value due to credit notes, returns, disputes, or short payments.
Supply Chain Finance (SCF)
29. Supply Chain Finance
A buyer-led financing program where suppliers can be paid early on approved invoices by a funder, using the buyer's stronger credit rating.
30. Reverse Factoring
The technical name for buyer-led SCF — financing initiated by the buyer rather than the supplier.
31. Approved Payables Finance
Another name for reverse factoring, emphasizing that financing is offered only after the buyer approves the invoice for payment.
32. Dynamic Discounting
A self-funded early payment program where the buyer uses its own cash to pay suppliers early in exchange for a discount that scales with how early the payment occurs.
33. Static Discounting
A traditional early payment discount with fixed terms (e.g., 2/10 Net 30 — 2% off if paid within 10 days, otherwise due in 30).
34. Distributor Finance
Financing extended to a buyer's downstream distributors to help them carry inventory and pay the manufacturer.
35. Inventory Finance
A working capital facility secured by inventory, often used to fund goods in transit or held at a 3PL.
36. Pre-Shipment Finance
Working capital extended to a supplier before goods are shipped, to fund raw materials, labor, and production.
37. Post-Shipment Finance
Financing extended after goods are shipped but before the buyer pays — bridging the receivables gap.
38. Confirmed Payable
An invoice that has been approved by the buyer and is irrevocably committed to be paid on a future date.
39. Off-Balance-Sheet Financing
A structuring approach (often used in SCF) that keeps the obligation off the company's reported debt — subject to recent FASB and IFRS disclosure rules.
40. Days Payable Outstanding (DPO)
The average number of days a company takes to pay its suppliers — a key working capital metric SCF programs are designed to extend. See our deeper treatment of extended terms and supplier-pay structures for how DPO interacts with supplier liquidity.
41. Days Sales Outstanding (DSO)
The average number of days it takes to collect from customers — the supplier-side equivalent of DPO.
42. Cash Conversion Cycle (CCC)
DSO + Days Inventory Outstanding – DPO. The total number of days cash is tied up in operations.
Purchase Order Financing
43. Purchase Order Financing (PO Financing)
Short-term financing used to pay suppliers directly so a company can fulfill a confirmed purchase order it otherwise couldn't afford to produce.
44. Trade Credit
Open-account terms extended by a supplier to a buyer (e.g., Net 30, 60, 90) without a formal financing instrument.
45. Net Terms
Payment terms expressed as the number of days until payment is due after invoice date (Net 30, Net 60, Net 90).
46. Open Account
A trade arrangement where goods are shipped and delivered before payment, with no documentary banking instrument — common between trusted parties.
47. Cash Against Documents (CAD)
Payment made when shipping documents are presented, without an LC's bank guarantee.
48. Cash in Advance (CIA)
The supplier requires payment before production or shipment — most common with new or higher-risk buyer relationships.
Cross-Border and USMCA-Specific Terms
49. USMCA
The United States–Mexico–Canada Agreement, the trade pact that replaced NAFTA in 2020 and governs tariff treatment for qualifying North American goods. See the USTR overview.
50. Certificate of Origin
A document certifying that goods qualify for preferential tariff treatment under a trade agreement like USMCA.
51. Regional Value Content (RVC)
The minimum percentage of a product's value that must originate within the USMCA zone to qualify for duty-free treatment.
52. Maquiladora / IMMEX
A Mexican manufacturing program allowing duty-free import of inputs that are processed and re-exported. See our breakdown in Reshoring Terms Glossary: 75 Key Concepts Every Buyer Should Know.
53. FX Hedging
Financial contracts used to lock in exchange rates and reduce exposure to peso/dollar volatility.
54. Forward Contract
An agreement to exchange currency at a predetermined rate on a future date.
55. Natural Hedge
Matching the currency of revenues and expenses to neutralize FX exposure without derivatives — common when US buyers pay Mexican suppliers in USD.
56. Incoterms
Internationally recognized terms (FOB, CIF, DDP, EXW, etc.) defining who bears cost and risk at each stage of shipping. The current 2020 ruleset remains the standard.
57. DDP (Delivered Duty Paid)
An Incoterm where the seller bears all costs and risks up to the buyer's named destination, including duties.
58. FOB (Free on Board)
An Incoterm where the seller's responsibility ends when goods cross the rail of the vessel at the port of shipment.
59. Customs Bond
A surety instrument guaranteeing payment of duties and compliance with customs regulations.
60. Foreign Trade Zone (FTZ)
A US-designated area where goods can be stored, processed, or assembled without entering customs territory.
61. Section 301 Tariffs
Duties imposed on Chinese-origin goods under the USTR Section 301 investigation — a primary economic driver of reshoring to Mexico.
Embedded and Modern B2B Finance
62. Embedded Finance
Financial services delivered inside a non-financial software platform — for example, factoring offered inside an invoicing tool.
63. Embedded Payments
Pay-out and pay-in capabilities built directly into B2B operating platforms.
64. API-Driven Underwriting
Credit decisions made in real time using data pulled via APIs from ERPs, accounting systems, and bank accounts.
65. Buy Now, Pay Later (B2B BNPL)
Short-term installment financing offered at the point of B2B checkout.
66. Virtual Card
A single-use or limited-use card number issued for a specific supplier payment, often used to capture rebates and extend DPO.
67. KYB (Know Your Business)
The B2B equivalent of KYC — identity and risk verification on a business entity.
68. Sanctions Screening
Automated checks against OFAC and similar lists to ensure counterparties are not prohibited.
69. ERP Integration
Direct data connection between an embedded finance product and the customer's ERP (NetSuite, SAP, etc.).
70. Three-Way Match
Reconciliation of purchase order, goods receipt, and invoice — a key control before invoices become eligible for SCF.
Risk and Underwriting Terms
71. Credit Insurance
Insurance covering non-payment risk on commercial receivables, often used to enable non-recourse factoring.
72. Trade Credit Limit
The maximum exposure a supplier or factor is willing to extend to a particular buyer.
73. Country Risk
Political, economic, and regulatory risk associated with a counterparty's country — a factor in pricing cross-border facilities.
74. Concentration Risk
Risk arising from over-dependence on a single buyer, supplier, or counterparty in a receivables or payables portfolio.
75. Covenant
A contractual obligation in a financing agreement — often financial ratios the borrower must maintain.
How These Terms Fit Together in a Reshoring Deal
A typical US-Mexico nearshoring program touches at least a dozen of the terms above. A US buyer might issue a PO to a new Mexican supplier under USMCA with a Certificate of Origin, ship DDP under modern Incoterms, request Net 60 terms while offering the supplier access to a reverse factoring program priced off the buyer's credit. The supplier may use pre-shipment finance to fund raw materials, then sell its confirmed payable into the SCF facility on day one, achieving an effective DSO of under five days. The buyer's CFO, meanwhile, extends DPO without touching the balance sheet — assuming the program is structured to remain off-balance-sheet under current disclosure rules.
For a side-by-side decision framework, see our comparison of LC versus SCF for nearshoring deals. For policy-side vocabulary — HTS, FTZ, Section 301 — our Glossary of Trade Policy Terms is the companion reference.
Why Financing Vocabulary Matters in Reshoring
Reshoring decisions are usually framed as operational: tooling, factory capacity, lead times, quality. But the financial mechanics determine which suppliers you can actually work with. A Mexican factory with great IATF-certified capability may still be unbankable if it can't fund a 60-day production cycle without an advance — unless you bring a financing solution to the table.
That's why we treat the core financing toolkit as part of the reshoring stack at Reshore, alongside supplier matching, tooling transfer, and logistics. The factories that can flex on payment terms — usually because they have access to factoring, SCF, or embedded financing — are the ones that scale with you. The ones that can't, won't.
If you're early in the journey, our Supplier Qualification Checklist includes the financial diligence questions to ask before signing, and our trade finance FAQ for SMB manufacturers covers the questions finance teams raise most often.
Frequently Asked Questions
Q: What is the difference between trade finance and supply chain finance?
Trade finance is the broader category — it includes any instrument used to facilitate commercial trade, from letters of credit to documentary collections to factoring. Supply chain finance is a specific subset: buyer-led programs (also called reverse factoring) that let suppliers receive early payment on approved invoices using the buyer's credit rating. Trade finance is generally transaction-by-transaction; SCF is programmatic and tied to a specific buyer-supplier ecosystem.
Q: Is factoring considered debt on a manufacturer's balance sheet?
It depends on the structure. True-sale, non-recourse factoring typically moves receivables off the balance sheet because the credit risk has genuinely transferred to the factor. Recourse factoring is generally treated as secured borrowing and stays on the balance sheet. Recent FASB and IFRS disclosure rules also require companies to disclose certain SCF program details even when the obligation remains off-balance-sheet, so always consult your auditor on classification.
Q: How do US buyers typically pay Mexican manufacturers under USMCA?
Most established US-Mexico relationships run on open account terms in US dollars, often Net 30 to Net 60, with payment by wire or virtual card. New relationships may start with partial cash in advance or a letter of credit until trust is established. Increasingly, buyers layer a supply chain finance program on top so suppliers can elect early payment, which is especially useful for Mexican manufacturers facing peso/dollar working capital pressure.
Q: What are the most common trade finance terms a CFO should know before approving a nearshoring program?
At minimum: letter of credit, supply chain finance, reverse factoring, dynamic discounting, DPO, DSO, cash conversion cycle, advance rate, Incoterms (especially DDP and FOB), certificate of origin under USMCA, and off-balance-sheet treatment. These twelve terms cover roughly 80% of the financial structuring decisions in a typical reshoring deal.
Q: Does Reshore help with financing arrangements during a reshoring project?
Reshore coordinates the operational side of reshoring — supplier matching, tooling transfer, factory sourcing, and logistics — and we surface financing-relevant data about candidate suppliers, such as their payment term flexibility and existing factoring relationships. We work alongside specialized trade finance providers rather than acting as a lender ourselves, and we can introduce clients to platform partners offering PO financing, factoring, and embedded SCF tailored to cross-border manufacturing.
Q: What is the difference between purchase order financing and invoice factoring?
PO financing funds production before goods are made — a lender pays your supplier directly so you can fulfill a confirmed order. Invoice factoring funds you after delivery — you sell the resulting invoice for immediate cash rather than waiting for the buyer to pay. The two are often used sequentially in the same transaction: PO financing covers production, then factoring covers the gap between shipment and customer payment.
Q: Why is FX hedging relevant when sourcing from Mexico if invoices are in US dollars?
Even when invoicing in USD, the Mexican manufacturer's cost base is primarily in pesos — labor, utilities, local inputs. A weakening peso can improve their margins, but a strengthening peso can pressure them to renegotiate prices or extend lead times. Sophisticated US buyers monitor this and either build pricing adjustment clauses into contracts or work with suppliers that hedge their own peso exposure, because supplier financial stability eventually shows up in operational performance.
Q: How long does it take to set up a supply chain finance program for a new Mexican supplier base?
For an established US buyer with an existing SCF platform, onboarding a new supplier typically takes 2–6 weeks once KYB, sanctions screening, and ERP integration are complete. Standing up a program from scratch — selecting a funder, negotiating terms, integrating ERP, and onboarding the first cohort of suppliers — generally takes 3–6 months. Embedded finance platforms have compressed this timeline significantly compared to traditional bank-led programs.