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Popular Bank Instruments

In our field of work there are two highly popular bank instruments. The Bank Guarantee and the Standby Letter of Credit. Both these instruments are used for monetisation purposes.  

What is a Bank Guarantee  

Bank guarantees act as securities for payment, which sit under two categories… 

Performance Guarantee – This Guarantees payment to the beneficiary of the performance guarantee. A claim may be made if performance by the applicant on a contract has not been carried out resulting in a loss. For example, an overrun on a passenger liner or a hotel. 

Financial Guarantee – This guarantees payment to the beneficiary if the applicant reneges on payment to the beneficiary. 

In both cases the applicant is the counterparty to the contract. The applicant instructs their bank to issue the bank guarantee, referred to as the issuing bank. This bank meets any claims on the bank guarantees. 

What is a Standby Letter of Credit  

A standby letter of credit is a means of payment unless it is monetised. In this event it becomes a guarantee of payment.  

A standby letter of credit is recognised as a global bank instrument used for trade finance purposes. It is a contract between a buyer and seller and is a payment of the last resort. Sometimes a seller may feel the buyer is not creditworthy. They will ask the buyer to arrange a standby letter of credit naming the seller as beneficiary.  

If the buyer does not pay the seller for goods received the seller can claim against the standby letter of credit. It therefore becomes the payment of last resort. The seller will instruct their bank to claim against the buyer’s bank. The buyers bank or issuing bank will make a similar claim against the buyer. 

We are often asked the what is the difference between a Documentary Letter of Credit and a Standby Letter of Credit… 

Documentary Letter of Credit – Payment is guaranteed only on the performance of the seller. 

Standby Letter of Credit – Payment is guaranteed on the non-performance of the buyer. 

To obtain these types of banking instruments, please get in touch or contact IntaCapital Swiss.

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