Banking instruments

Bank guarantee provide banks or other credit – financial institutions, at the request of the borrower (principal) a written obligation to pay to the creditor of the principal (beneficiary) in accordance with the conditions given by the guarantor liability sum of money by submitting by beneficiary a written request of its payment.

For the issuance of the guarantee principal pays a fee to the guarantor.
The bank guarantee cannot be revoked by the guarantor and transferred to another person, if it does not provide otherwise.

As a rule, the bank guarantee is irrevocable, because it cannot be revoked by the issuing of its guarantor.

Rights of the beneficiary under the bank guarantee non-transferable, because belongs to the beneficiary requirement to the guarantor cannot be transferred to another person.

For our clients, we guarantee releases – an independent obligation to the benefit of recipient to pay a certain amount against the written request of benefits of the recipient with the application for failure to counter partner benefits recipient of its obligations under the contract.

As in the case of a letter of credit, bank guarantee – independently from the contract obligation of the bank to pay against the provision of documents, but the essence of the guarantee is to ensure fulfillment of obligations, meaning a payment by the guarantee holds in the case of non-fulfillment of contractual obligations.

Since a guarantee – an instrument, completely independent from the contract, the bank that received a request by the guarantee, is obliged to perform a payment, regardless of the actual situation with the performance by the applicant of its obligations.

Guarantees (in the case of imports of goods, works or services) are available to provide more favorable conditions of supply.

Having at their disposal a bank guarantee, the beneficiary (seller) can provide to the principal (buyer) trade credit (delay), or increase the amount or the grace period, to provide an additional discount on the purchased products and so on.

The beneficiary (seller) knows that the risk of non payment by principal (buyer) for the delivered goods (works, services) is already covered by a bank guarantee.

For the buyer a guarantee profitable because of low cost and the possibility of additional commercial benefits from the seller.

Guarantee is a very flexible and convenient financing instrument: if with seller reached an agreement about using the guarantee and to the buyer granted a deferment of payment, than the buyer may independently plan the purchases and calculation with the seller on condition that the amount of debt of the buyer to the seller will not exceed the amount of the bank guarantee.

For obtaining payment under the guarantee the seller must provide to the issuing bank of the guarantee in writing free-form application that the buyer has not fulfilled its contractual obligations.

Sometimes to the statement have to be attached copies of not paid invoices and / or transport documents confirming shipment of goods to the buyer.
The authenticity the Seller’s statement have to be confirmed by the bank, in which he served.

The bank guarantee obeys the laws of the country in which it was released.
Therefore, foreign suppliers ask to provide a guarantee, which would be governed by the laws of the country where they are located.

It is not always convenient for the buyer because for the release of guarantee is necessary to involve third bank, which is in the seller’s country.

In this case, our company offers to issue an irrevocable standby letter of credit (the analog of the bank guarantee), which obeys to the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce.

Basic forms and types of guarantees

Bank guarantees are a very versatile and flexible documentary instruments allowing reduce not only the risk of payments, but also many other risks such as the risk of default of contract, breach of warranty and tender obligations.

We produce the following types of guarantees

1. Guarantee payment obligations – collateralization of obligations for the buyer to pay the stipulated sum under the contract.
2. Advance payment guarantee – collateralization of obligations of the seller to perform advance payment return, listed to him by the buyer under the contract.
3. The guarantee of the contract performance – a guarantee that can be opened to ensure the proper execution of the contract (supply of goods of the stipulated quality and completeness in a timely manner, and so on). Exhibited usually on 5% -20% of the contract amount.
4. Tender guarantee – a guarantee of performance by the tenderer of his tender obligations. As a rule, the tender commitment is signing the contract of established sample and to provide guarantee of performance of the contract (exhibit usually on 1% -5% of the contract amount).
5. Guarantee of loan repayment – bank guarantee in favor of a lender to ensure obligations of repayment by the borrower the loan granted to him by the lender.
6. Guarantee of re-exportation – collateralization obligations of the party performing the duty-free importation of equipment into the country with the obligation of export it after a certain time (for example, for demonstration at the exhibition, and so on).
7. Guarantee of investment obligations – a guarantee to secure the obligations of the investor to fulfill its investment obligations. As a rule, it required as a condition of participation in the tender for buying shares.
8. As a rule, guarantees are issued for a period of 1 (one) year and 1 (one) month.

Bank Guarantee will be released by SWIFT MT 760.
All confirmation and notification occur only by SWIFT.

The attractiveness of the bank guarantee

1. Provides the interests of contractors in a variety of fields.
2. Do not distract from the circulation monetary resources.
3. Provides an opportunity to get trade credit from the counterparties, ensuring that a bank guarantee acts.
4. Being a “conditional payment obligation”, guarantee is cheaper product, compared with the credit or factoring.

One kind of documentary letters of credit is the “Standby Letter of Credit (SBLC)”.

Standby Letter of Credit – is a written obligation of the issuing bank to the beneficiary (exporter, supplier) to make payment for the ordering party (importer, purchaser) in case of failure latter of his respective contractual obligations and presentation of written demand for payment by the beneficiary.

Standby letter of credit often issued for the provision guarantee of obligation performance of the ordering party in front of beneficiary.
Standby letter of credit is issued for a period (usually this period corresponds to the period of the contract or the date of delivery of goods under the contract) and can be terminated any time (extended) based on the application instructing party and with the consent of the beneficiary.
Standby Letter of Credit is issued in addition to the contract providing for regular payments by instructing party to the beneficiary.

Payments under the contract are carried out by instructing party regardless to the issue of instructing standby letter of credit.

We are releasing for our clients “Standby Letter of Credit (SBLC)”, carrying out functions of guarantees, i.e. it works only in the case of breach of contract.

The difference between the standby letter from the guarantee is that the standby letter of credit may be subject to the Uniform Customs and Practice for Documentary Credits (UCP 600), which stipulate certain standards for checking documents, which does not apply to guarantees.
Thus, if the beneficiary by the guarantee is accompanied by the documents confirming the performance of its obligations, the bank verifies only the presence of these documents and, possibly, their compliance with the requirements contained in the guarantee.

In the case of the use of standby letter of credit, the documents shall comply the standards specified in the UCP 600, as well as to each other, which greatly increases the degree of protection.

Submission standbys “Uniform Customs and Practice for Documentary Credits” also eliminates problems associated with the fact that the guarantee is generally obey the legislation of the country of the bank guarantor.

The similarities between letters of credit and guarantees

1. A letter of credit and a guarantee owe their origin and existence of the need to ensure obligations of partners for any deal.
2. A letter of credit and guarantee are the bank’s obligation to make a payment to the beneficiary against certain specified documents;
3. A letter of credit and a guarantee paid when providing to the bank well-defined and clearly defined conditions of these instruments documents.
4. Commercial banks are opening letters of credit and guarantees on the basis of written confirmation about the presence of the applicant’s obligations, which are providing such guarantees or letters of credit (contract, application for participation in the tender and so on).

Differences between letter of credit and guarantees

1. A letter of credit is opened with the intention of using it, that is, a payment by letter of credit – a phenomenon that occurs in the normal course of events (method of payment). Guarantee also applies, rather, as a method of ensuring obligations and is used if in the process of implementing of the transaction one of the parties has failed to fulfill its obligations.
2. A letter of credit is used as a method of payment in some form or another. The guarantee can cover almost any type of obligation (guarantee advance payment, performance of contractual obligations, tender obligations, repayment of the loan, the payment of customs duty, the payment of a fine or fixed by the court compensation, compliance of the warranty period for the equipment, guarantee of the payment of judicial pledge, guarantee payment of the amount of transfer for a football player, and many others). Application of safeguards is thus much wider than the letters of credit.
3. A letter of credit is often a transferable instrument, because it allows you to optimize settlements between partners. Guarantee, in rare cases, can be transferable because all that is required for obtaining funds under the guarantee – a requirement of payment, which creates a certain ground to abuse this tool.

Advantages of order issuer

1. The possibility of obtaining goods without prepayment.
2. The ability to obtain the goods with delayed payment.
3. The possibility of temporary use of funds of the issuing bank letter of credit in case of occurrence a “guarantee” case and inability to make payments on time.
4. Guaranteed by the issuing bank letter of credit or a first-class foreign bank fulfillment of obligations to the beneficiary.
5. The possibility of early termination of the standby letter of credit in the case of fulfillment of the obligations to the beneficiary.

Advantages of the beneficiary

1. The double guarantee of payment for delivered goods – from the issuing bank and from the foreign bank;
2. The speed of obtaining funds under a standby letter of credit in case of failure by order issuer its contractual obligations;
3. The possibility of shipment until the moment of payment with a 100% guarantee of payment.

Standby letter of credit is used in cases if one of the parties of the transaction wishes to obtain the maximum guarantee of performance of contractual obligations by the other party.

Standby letters of credit give the beneficiary a 100% guarantee of payment for goods (works, services rendered).

Beneficiary completely minimizes his risks and ready to deliver the goods.
Standby letters of credit, as opposed to guarantees (which usually obey the legislation of the country of issue) obey the Uniform Customs and Practice for Documentary Credits (ICC Publication number 600) – international document which is binding.

The most used and secure payment system.

World practice shows a steady increase in the popularity of standby letters of credit when calculating foreign trade transactions.

Ease of use, transparency and accessibility of this type of international payments withdrawn relationship with your foreign partners to a new level.

A letter of credit is an obligation of the bank to pay the seller of goods or services a certain amount of money in the timely submission of relevant documents confirming the shipment of goods or performance of contractual services.

Documentary / Commercial letter of credit – one of the most important means of financing in international trade because letter of credit is a mean that lifts the most risks both from buyer (importer) and from seller (exporter).

Documentary / Commercial letter of credit – a very flexible and convenient tool of calculations, received the widest recognition and spread around the world due to the following advantages:

1. For the seller, the letter of credit is convenient because it reduces the risk of insolvency of the buyer, i.e. a letter of credit – unconditional obligation of the bank to pay, regardless of the presence or absence of a bank funds from the applicant of the letter of credit funds. Thus, the letter of credit provides a higher degree of protection interests of the seller in comparison with payment upon delivery or through collection.
2. For the buyer a letter of credit is convenient in that it provides a higher degree of protection of interests of the buyer as compared to the advance payment, and also removes the risk of unscrupulous sellers, because the letter of credit may be required, among other documents, document issued by independent third parties (Chamber of Commerce, an insurance company, an independent inspector).
3. The presence of “Uniform Customs and Practice for Documentary Credits”, internationally recognized, clearly defining and delimiting responsibilities of the parties a letter of credit allows promote the interests of the applicant or beneficiary. Thus, a letter of credit – the bank’s obligation as an independent arbitrator who shall do payment in compliance to all terms of a letter of credit, regardless of the possible litigation between the parties to the contract.

The principle of autonomy and independence of the letter of credit from the contract is fundamental.

What you need to pay special attention when choosing the letter of credit

It is important to clearly define the terms of the letter of credit: what kind of letter of credit, letter of credit payment terms, a list and description of documents submitted by recipient of funds and requirements for registration of these documents, the closing date of the letter of credit and period for provision of documents.

The mechanism of payment

1. The importer (buyer) has the guarantee that Bank will not perform payment at its expense until it receives the documents in accordance with the terms of the letter of credit and satisfies that the received documents by the external signs comply with the requirements of the importer.
2. Banks will refuse to pay for the documents at the expense of the importer, if the documents on the goods will not match the terms of the letter of credit, thereby protecting the interests of the importer.
3. The seller can be sure in receiving a payment as soon as he will provide in the bank documents that match the conditions of the letter of credit.
4. The seller receives against the shipping documents, specified in the terms of the letter of credit, instant payment (if the letter of credit provides payment terms – on demand).
5. Required documents usually include a disposition of the goods / shipping documents such as bills of lading (receipt of the captain of the vessel), waybill, duplicate of railway bill, showing that the goods have been shipped in accordance with the requests and specifications of the buyer.

Letter of credit calculations generally occurs by the following scheme

1. The exporter and importer agree about release of letter of credit (letter of credit calculations).
2. The importer (buyer) with the consent of the exporter (seller) asks his bank to issue a letter of credit. Bank of the importer (the issuing bank) thus undertakes to pay a fixed amount to the exporter if the exporter will provide documents that comply with the conditions of the letter of credit within a set period of time.
3. The issuing bank informs the exporter’s bank about opening the letter of credit.
4. The exporter’s bank (advising bank informs the exporter that in its favor issued a letter of credit).
5. The exporter ships the goods, prepares the necessary documents and sends them to his bank for providing to the executing bank.
6. The executing bank checks the documents in the case of conformity of documents with terms and conditions of the letter of credit, the exporter shall pay the amount of the submitted documents, but it should not exceed the total amount of the letter of credit.
7. The executing bank forwards the documents to the importer’s bank for onward transmission to the importer, who can use them now for obtaining the goods.

General advantages of the letter of credit

1. A letter of credit is a very flexible calculation instrument that can be used for calculations for a variety of transactions for clients.
2. A letter of credit is a tool, the rules use of which determined by the authoritative international organization, they are uniform and recognized all around the world. This benefits both clients and banks, as each participant of the transaction has a clear understanding of their rights, responsibilities and standard requirements imposed to all participants in the operation.
3. A letter of credit is useful as a tool for short-term financing.

The benefits of the letter of credit for importers

1. A letter of credit can be opened at the expense of own funds of the client, with the funds provided by a bank on credit, as well as with provided by client other security to fulfill its obligations (pledge, deposit).
2. Payment is made after shipment and delivery of documents.
3. The importer determines the list of documents, against which will be carried out payment.
4. Limit the terms of providing the documents and the shipment of goods.

The benefits of the letter of credit for exporters

1. To the buyer’s obligation to make payment is added the obligation of the issuing bank; this obligation does not depend on the relationship between buyer and seller.
2. If letter of credit is confirmed, there is a guarantee of payment from the second bank.
3. Implementation of a letter of credit – a guarantee of payment.

We offer a full range of services on operations with letters of credit.