A letter of credit ("LC") is a flexible and internationally accepted form of financial guarantee. What it does depends upon what it says. But with that caveat, it is commonly organised to support the Trade Finance in goods. In this situation, it is transmitted by the importer's bank to the exporter's bank. The importer's bank:
An LC used to support the Trade Finance in goods typically follows a simple template. One bank "issues" it, the other bank "negotiates" it. In Trade Finance, the issuing bank and the applicant are on the importer side, and the negotiating bank and the beneficiary are on the exporter side. It is usually transmitted between the banks by SWIFT. This kind of LC has different parts:
There are many types but in Trade Finance, three types are commonly used in transactions involving the shipment of goods:
An import LC is used to give confidence to an exporter so that he can ship the goods to the importer before being paid. In some markets, a letter of credit from an importer is also used as collateral by an exporter to obtain local financing ("back-to-back"). An exporter may borrow against a purchase order that is supported by an LC arranged by the importer.
Letters of credit to support the import and export of goods are usually organised by the importer on a Trade Finance. There are two ways:
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 guarantees. 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 Finance 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. There are certain types of a standby letter of credit which are mentioned below:
A documentary 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 countries. 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.
Calls for limits and restrictions. Please ask for each bank restrictions and line limits: Habib Bank AG Zurich
Calls for limits and restrictions. Please ask for each bank restrictions and line limits:
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. Following are the different bank guarantee types that are available: A Bank Guarantee is a versatile tool which can function as a number of instruments: a bid bond, a performance bond, and advanced payment guarantee, a warranty bond, a letter of indemnity, a payment guarantee, a rental guarantee, or a confirmed payment order. A BID BOND is usually issued for bidders on construction or similar tender based projects. A bid bond is a debt secured by a bidder. In effect, it serves to secure the bidder’s investment in the project and to discourage bidding by less serious players. A bank guarantee could be presented as a partial alternative to the financial capital typically required by a project owner. A PERFORMANCE BOND, 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 favor 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 fulfill 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.
A banker's draft (also called a bank cheque, bank draft in Canada or, in the US, a teller's check) is a cheque (or check) provided to a customer of a bank or acquired from a bank for remittance purposes, that is drawn by the bank, and drawn on another bank or payable through or at a bank
We need the following documents/ information for finalising the draft –