Bank Guarantees For Imports Overview
Bank Guarantees just may be the perfect method of financing import trade. They offer numerous benefits, protecting both importers and exporters in cross-border trade transactions. Chief among the benefits of using bank guarantees is that they grant an absolute guarantee of performance and payment to the exporter in international trade deals.
With a bank guarantee in a cross-border trade transaction, the exporter no longer bears any payment default risk. With no risk of default and the exporter feeling much more secure with the transaction, an importer is in a much better position to negotiate favorable deal terms.
» Bank Guarantees provide a great deal of comfort for the exporter who has an absolute guarantee of payment
» With a comfortable exporter, the importer almost certainly gains the ability to negotiate favorable trade terms
» Bank Guarantees give small business importers immediate acceptance in global trade deals
» Because they are universally accepted, Bank Guarantees give importers the leverage to buy anywhere in the world
» Bank Guarantees eliminate payment default risk which gives importers and exporters flexibility in negotiating terms
Bank Guarantee Request
Bank Guarantee Details
Although a Bank Guarantee seems very similar to a letter of credit, and there are similarities, they are very different instruments which are used for very different purposes. A letter of credit is used in trade finance to ensure that a transaction proceeds as planned. A Bank Guarantee is used to mitigate losses if a transaction doesn’t go as planned.
A letter of credit is an obligation by a bank to make a payment once certain contractual criteria are met. Once the required terms are completed and confirmed, the bank will transfer the funds. The clear purpose is to ensure payment will be made as long as the services are performed.
Similarly, a Bank Guarantee is a financial instrument issued by a bank that guarantees that a stipulated sum will be paid to a beneficiary. However, unlike a letter of credit, the sum is only paid if the opposing party in the subject transaction does not fulfill the stipulated obligations under the contract. Thus, a Bank Guarantee essentially serves to insure a buyer or seller against losses or damage due to nonperformance of the other party to the transaction.
Documentary discrepancies in Bank Guarantees are very common, and could potentially negate payment to the exporter. Bank Guarantees and associated documents should always be negotiated and prepared by experienced trade finance providers.
Using Bank Guarantees For Imports
Bank Guarantees might be used when a buyer obtains goods from a seller but is then unable to pay the seller as agreed. The Bank Guarantee would pay the seller in the transaction a contractually agreed upon amount. Similarly, if a seller was unable to deliver the goods according to the terms of a contract, a BG would obligate the bank to pay the purchaser the contractually agreed-upon amount. Essentially, Bank Guarantees are a safety mechanism for the opposing party in the transaction.
Bank Guarantees are often used in trade financing when buyers and sellers are purchasing and selling goods to and from overseas customers with whom they have no established relationship, in which case a BG is designed to reduce the risk which is borne by each party to a transaction.
Benefits Of Using Bank Guarantees For Imports
- Bank Guarantees give small businesses the ability to reassure the opposing parties to a contract that they have the ability to pay for and finance projects that would otherwise seem beyond their capacity
- Bank Guarantees provide financial credibility and creditworthiness backed by a bank
- Bank Guarantees can be used in virtually every market around the globe and in virtually every business sector
- Bank Guarantees give the parties to a transaction a great deal of flexibility in negotiating contract terms over geography and currency
Global Trade Funding provides world-class advisory services to assist clients in the deal structuring of every transaction undertaken. This includes Bank Guarantee advisory support to structure and negotiate the terms of Bank Guarantees. See Advisory Services.
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