How Useful are Bank Guarantees and Standby Letters of Credit
What is so special about a Bank Guarantee and a Standby Letter of Credit? This question is posed to us on a daily basis, but the real question is why are we so special? The answer is, we can guide you to companies that can monetise these instruments.
To start with what are the differences between these two bank instruments. A bank guarantee is a Guarantee of Payment. A standby letter of credit is a Means of Payment. If a standby letter of credit is monetised it also becomes a Guarantee of Payment.
Brief Description of Bank Guarantees
There are two classifications of bank guarantees. The financial guarantee and the performance guarantee.
Financial Guarantee – is where the beneficiary of the instrument is guaranteed payment. This will be paid in the event of non-payment by the applicant.
The Performance Guarantee – is where the beneficiary is covered if they incur a loss. They are guaranteed payment if the applicant does not perform as per contract. This can be in the form of late delivery of an aeroplane. On a smaller scale an overrun on building a house.
The applicant is the counterparty to the beneficiary. The applicant instructs their bank to issue the bank guarantee. The issuing bank are legally bound to pay all claims within the terms and conditions of the bank guarantee.
Brief Description of Standby Letters of Credit
A Standby Letter of Credit is a trade finance instrument, supporting both global and national trade agreements. It is a contract between a buyer and a seller, issued by the buyers when the seller is uncertain of payment. It is a payment of last resort.
In this situation the buyer instructs their bank to issue a Standby Letter of Credit naming the seller as beneficiary. If the buyer fails to pay for goods received the seller will claim against the Standby Letter of Credit. The seller will instruct their bank to claim the sum owed from the issuing bank.
How does a Standby Letter of Credit, (SBLC), Differ from a Documentary Letter of Credit, (DLC)
A Documentary Letter of Credit is a guarantee of payment on the successful performance of the seller.
A Standby Letter of Credit is a guarantee of payment on the unsuccessful performance of the buyer.
For further, detailed information on how to obtain a bank guarantee please go to www.intacapitalswiss.com