Are you running an import or export business? Are you worried about not getting a break from suppliers and vendors you haven’t transacted with yet? Credibility is an important element in determining how successful you’ll be in finding opportunities for trade. If this is the case, how can you inspire the confidence of other businesses if they have no experience to base their opinion on yet?
This is one of the scenarios in which a bank guarantee letter will prove to be of tremendous help. It allows you to engage in transactions with confidence. You can conduct business despite the fact that you have yet to establish a relationship with the other party. Bank guarantee letters and standby letters of credit are designed to help suppliers and vendors in purchasing or selling goods in the international arena by reducing the risk taken by the other side.
Although these two financial instruments are similar in a variety of ways, it’s important to note their differences so you’ll know which to use, and when. Basically, a bank guarantee letter reduces the loss if the transaction doesn’t go as expected while a letter of credit ensures that the transaction will go just as planned.
What exactly does that mean? A letter of credit is an obligation the bank takes to pay once its criteria are met. When certain terms have been completed and verified, the bank will provide the funds to ensure payment. Meanwhile, a bank guarantee ensures a sum of money to a beneficiary. Where the sum is only transferred when terms are met in a letter of credit, the sum is only paid to the beneficiary if terms are not met by the other party in a bank guarantee.
For example, a seller may ask for a letter of credit before the transaction occurs to ensure payment. On the other hand, a bank guarantee comes in really handy when the buyer experiences cash flow problems and can’t pay or when the supplier fails to provide the goods. It serves as a safety measure for the other party in the transaction.
A bank guarantee enables you to negotiate well with buyers or suppliers by offering them protection in case of non-performance in a contract. This allows you to boost your credibility and conduct business with confidence even in situations where you have yet to establish a relationship with the other party.
Financial guarantees, non-financial guarantees, and standby letters of credit are the basic guarantees commonly offered by financial institutions to help businesses in situations involving new trading partners. Learn more about bank guarantee letters here.
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