1. Letter of Credit (L/C)
2. Standby Letters of Credit (SBLC)
3. Bank Guarantee (BG)
4. Performance Guarantees
5. Advance payment Guarantees
6. Ready Willing and Able (RWA)
7. Proof of Funds (POF)
A letter of credit is a guarantee that
provides assurance to the beneficiary that he will get the payment
which has been mentioned in the documentary letter of credit. There
is a condition that the compliant presentation should be under the
documentary letter of credit. This documentary letter of credit is
commonly used for international transactions where both the buyer and
the supplier have a new relationship and operate from different
A documentary letter of credit is a really crucial financial instrument for meeting the short-term needs. It enables the recipients for obtaining the important credit for financing the project. The recipients hope of getting sufficient return for settling the due amount in the provided time frame.
The documentary letter of credit showcases the documents and information that are needed by the beneficiary on presentation which includes the expiry information like date and time of the letter. The compliant presentation is a kind of guarantee given to the beneficiary by the documentary letter of credit for in order to get paid. The only criterion is that the delivery conditions should be met.
It is the responsibility of the bank that writes the letter of credit on the applicant’s behalf to ensure that the terms and conditions which are required for documentation purposes under the credit are met duly before any amount is paid to the supplier. Documentary letter of credits come under the governance of the International Chamber of Commerce (ICC) rules. These rules for the letter of credit are known as Uniform Customs and practice for documentary Credit (UCP). The current version which is in effect is the UCP600 from July 1st, 2007. The concerned parties to a documentary letter of credit are the issuing bank and the beneficiary.
In these cases the credit worthiness of the issuer stands in place of the credit worthiness of the buyer – giving the supplier greater comfort that he will be paid.
A guarantee issued by a bank or a
financial institution to pay a beneficiary on a client’s behalf in a
situation where the applicant defaults, is known as a standby letter
of credit. This was developed as a consequence of legal limitation
put by the US regulator on the bank’s authority for issuing
A standby letter of credit is considered quite suitable for a wide range of secure payments making it quite a flexible tool. Most commonly, it is used for international trade purposes for providing assurance to the party that it will receive the payment whatever the case it. Having said this, there are quite a few complexities involved in a standby letter of credit. This suggests that it is necessary to have a consultation with an expert in case complete information is not available regarding the procedure.
A promise made by the bank for meeting the
liabilities of a debtor when a person fails to fulfill his
contractual obligations. There are two types of bank guarantees —
Direct or indirect:
A direct guarantee is one where a bank is asked to provide a guarantee by its account holder, in favour of the beneficiary.
In an indirect guarantee, a second bank issues a guarantee in return for an already issued guarantee. When the second bank suffers losses when a claim is made against a guarantee, the issuing bank will make sure that it compensates all the losses. Guarantees provide comfort to the beneficiary; in case the applicant fails to meet his obligations (either financially or by performance) as per the contract made between the applicant and the beneficiary, the beneficiary will have the guarantee to turn to for payment.
Having a guarantee issued in support of a client’s transaction can help the client grow and expand their business by postponing current payments for goods and/or services to a later date, provide comfort to buyers, allow clients to bid on transaction , without requiring that ITF’s clients tie up their available cash.
4. A PERFORMANCE GUARANTEE, or CONTRACT BOND is utilized in the real estate industry to make sure a contractor completes a designated project. A performance bond is issued by a bank, insurance company or a financial institution in favour of a beneficiary by order of an applicant, against the applicant’s failure to meet its obligations as per an underlying contract. A performance bond often covers 100% of the contract value and can replace a bid bond when the applicant has been awarded a contract. If effect, applicants use performance bonds to comfort suppliers who are concerned with the prospect that the applicant might become insolvent or otherwise unable to fulfil his contractual obligations. In case of insolvency of the applicant, the beneficiary receives compensation that should ease financial stresses or other damages caused by the contractor.
5. An ADVANCE PAYMENT GUARANTEE, or ADVANCED PAYMENT BOND is an agreement where an issuer undertakes responsibility to return an advanced payment to the buyer, should the seller fail to meet his obligations. PAYMENT GUARANTEE provides the supplier with financial security in case the applicant fails to pay for goods or services supplied. Payment guarantees mitigate credit or country risk when the supplier ships the goods on an open account basis, which is to say, before receiving payment. Payment guarantees are typically issued to cover debts in cases of non-payment arising under a transaction or over a period of time. The instrument’s wording is based on the terms outlined in the original debt agreement between the applicant and the beneficiary. The applicant will make a repayment based on these terms. Sometimes a payment guarantee can be backed with collateral, such as property or asset that is pre-approved by the lender.
A guarantee issued
by a bank or a financial institution to pay a beneficiary on a
client’s behalf in a situation where the applicant defaults, is known
as a standby letter of credit. This was developed as a consequence of
legal limitation put by the US regulator on the bank’s authority for
6. RWA Messages:
Ready willing and able (RWA) is a document that a bank or a financial institution issue on the clients’ behalf. The document showcases the capability and intent (both financially and legally) for entering into the financial transactions. The RWA’s are also referred to as the bank comfort letters.
7. Proof of funds
Proof of funds is a bank statement or a document that demonstrates that a company or a person has the money to finalize the transaction. The purpose of the document is to ensure that the financial ability that is required for the transaction is legitimate and procurable. The document is mostly used for funding those projects that require a huge amount of money for investing, often for real estate transactions.
There is a possibility that proof of funds is used by certain people that might carry out financial scams. This makes it necessary to present with a proof of funds for investigating the other party thoroughly and performing
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