Bank Instruments such as Standby Letters of Credit and Guarantees are frequently used but seldom properly understood.
Whilst these ‘instruments’ are utilized in conventional trading on a day to day basis, they can also be employed in complex financial structures designed to maximize financial positions and bespoke to each individual requirement.
Bank Guarantees are used for guaranteeing payments in a number of given circumstances. Often referred to as BG’s. Bank Guarantees are worded specifically for the purpose and specifically written to the stated parties thereto. The use of Bank Guarantees are becoming increasingly common, for example in lieu of deposit payments. Applicants may opt to issue a bankers guarantee instead of parting with a cash deposit. They can also be used for offsetting or deferring payments and can be used in intelligent financial structures.
Standby Letters of Credit (commonly called SBLC’s) are used in the US/ASEAN Countries in lieu of Bank Guarantees and work in a similar fashion.
Neither Standby Letters of Credit nor Bank Guarantees can be bought or sold nor are they tradable securities. Our expert banking team hold a full and complete understanding of all bank instruments, letters of credit and guarantees and are able to advise our Clients on all areas of their utilization.
What Is a Standby Letter of Credit?
A standby letter of credit is a document issued by a bank. This document serves as a guarantee: the bank promises to pay a "beneficiary" if something fails to happen.
Standby letters of credit, like standard letters of credit, can be used for international trade as well as domestic transactions in your home country.
The letter of credit provides security from the bank, which is presumably a disinterested third party. If the bank's customer fails to do something (like pay on time, complete a project on time, or satisfy certain terms of an agreement) the bank – not the customer who failed to deliver – pays the beneficiary.
What Is a Bank Guarantee?
A bank guarantee is a promise from a bank or other lending institution that if a particular borrower defaults on a loan, the bank will cover the loss. Note that a bank guarantee is not the same as a letter of credit.
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