What is the difference between LC and guarantee?

What is the difference between LC and guarantee?

IMF stand-by credit

When talking about foreign trade, it is essential to talk about documentary credits. They fulfill three fundamental functions: guarantee, payment and financing. For a company accessing these markets for the first time, it is often a great unknown, which is why we are going to provide a quick guide to documentary credits.

First of all, we will see what they are and how they basically work; then, we will focus on the different types of documentary credits and the most common commissions they generate; and finally, we will look at the advantages and disadvantages of documentary credits for both the importer and the exporter.

The documentary credit is a payment mandate that the importer sends through its financial entity so that, directly or through another bank, it pays the exporter the amount of the operation, as long as the exporter strictly complies with the conditions of the credit itself (generally the delivery of certain documentation). Let’s take a closer look to understand the role played by each of the parties:

Sblc

Bachmann & Welser Capital Group has its own monetization facilities and works with leading partners, such as top-tier global banks, to carry out the monetization of instruments for clients worldwide. We can also consider the monetization of bank instruments issued from all institutions or banks.

To monetize a bank instrument such as a BG (bank guarantee) or SBLC (credit guarantee), the client must own or be in possession of the instrument, which must be verified prior to the process.

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– Banks are classified from where the instrument was issued. – The classifications and jurisdictions of the receiving banks. – Feasibility of the project. – Whether it is a direct payment or marketing. – The face value amount of the bank instruments.

Monetization of bank instruments is a powerful way to raise funds for projects, and therefore all of our monetization solutions require a brief project review for compatibility purposes. When full term compatibility and its LTV has been carried out, it will be provided to clients based on all the information presented.

Sblc mt760

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The stand-by letter is an atypical form of guarantee, of the so-called abstract ones, which is, in its form and function, located between the independent guarantees (guarantee on first demand or guarantee on first demand or similar) and the guaranteed means of payment of international trade (documentary credit), although it is true that stand-by letters with guarantee value are also widespread in domestic trade, and are conceived as something very similar to the guarantee on first demand.

It is, in short, a pure and simple payment order given by a credit institution as a guarantee in favor of the receiving creditor, to be executed simply by alleging that the debtor has not complied, without the need to prove such non-compliance.

Stand-by letter of credit example

It is the means of payment that offers greater security to the beneficiary (seller). This type of letter of credit is issued by the buyer’s bank abroad and is generally confirmed by a bank in the seller’s country.

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It is issued by the originator’s (buyer’s) bank abroad, which appoints another intermediary bank in the seller’s country to notify and deliver the L/C to the beneficiary.

Due to their very special nature, letters of credit with this clause are generally used when there is a close business relationship between the importer and the exporter, since there is a risk that the exporter may draw an advance payment and not ship the goods.

It has the same scope as the red clause, except that under the letter of credit issued with a green clause the advance payment is made upon presentation of a certificate of deposit or warrant, which ensures that the goods (total or partial) are available to the ordering party (buyer).