Non-Funded Loans
Letter of Credit
Bank Guarantee
Letter of Credit
A letter of credit, also known as a credit letter, is a letter from a bank stating guarantee that a buyer’s payment to a seller will be received on time and for the correct amount. When the buyer is unable to make a payment on the purchase contract, the guaranteeing bank will be obliged to cover the full or remaining amount of the purchase.
A letter of credit is frequently used in international trade. It is used to signify that seller will receive the payment on time and in full. This is guaranteed by a bank or financial institution. After a letter of credit has been sent, the bank will charge a fee. The fees are generally a percentage of the letter of credit. Apart from this, the buyer also has to offer collateral to the bank.
When the buyer proves to be unable to make a payment on the purchase contract, the guaranteeing bank will be obliged to cover the full or remaining amount of the purchase. Typically, the letter of credit is a negotiable instrument, which is why the issuing bank has to pay the beneficiary or any bank nominated by the beneficiary. In the case where the letter of credit is transferable, the beneficiary may assign the right to draw to another entity.
Bank Guarantee
A bank guarantee is a type of financial promise offered by a bank or lending institution. The bank guarantee means that the lender will ensure that the liabilities of a debtor will be met. In other words, the bank promises to cover a loss if a borrower defaults on a loan.
A Bank guarantee is a type of contractual obligation between the bank and its customers. Such guarantees are often used in business and personal transactions to protect the third party from the event of financial losses. A bank guarantee helps the debtors in the acquisition of goods, buying new equipments, or taking out a loan. This guarantee also helps the company to purchase things that it ordinarily could not, thus helping the business grow. The format of bank guarantee provides additional risk to the lender. This is why the loans with such a guarantee have greater costs or interest rates. Typically parties use bank guarantees for cross-border and international transactions.
