Banking Facilities
We are dealing with top banks locally and internationally whilst we help and support our business partners with their needs in Banking Instruments facilities like:
- Letter of Credit (LC), MT700
- Bank Guarantee (BG), MT760
- Medium-Term Notes (MTN)
- Standby Letter of Credit (SBLC)
Letter of Credit (LC)
Letter of Credit is an important payment method used in international trade. This letter of credit mitigates the risk for both the seller/exporter and the buyer/importer. It is governed by the rules and procedures known as Uniform Customs and Practices for Documentary Credits, which are set by the International Chamber of Commerce.
A letter of credit is a guarantee that provides the assurance to the beneficiary that he will get the payment which has been mentioned in the letter of credit.
Letters of credit are especially important in international trade due to the distance involved, the potentially differing laws in the countries of the businesses involved, and the difficulty of the parties meeting in person. Letters of Credit are primarily used in global transactions.
Letter of credit advantages for the seller
✓ The seller has the obligation of buyer’s bank to pay for the shipped goods.
✓ The opportunity to get financing in the period between the shipment of the goods and receipt of payment (especially, in case of deferred payment).
✓ The seller is able to calculate the payment date for the goods.
✓ The buyer will not be able to refuse to pay due to a complaint about the goods
✓ The seller does not run the risk of cancellation of the order as the Letter of Credit is irrevocable
Letter of Credit advantages to the buyer
✓ The bank will pay the seller for the goods, provided that the latter presents to the bank the determined documents as per the terms of the letter of credit.
✓ The buyer can control the time period for shipping of the goods.
✓ By a letter of credit, the buyer demonstrates his solvency.
✓ In the case of issuing a letter of credit providing for delayed payment, the seller grants a credit to the buyer.
✓ Providing a letter of credit allows the buyer to avoid or reduce pre-payment.
✓ The buyer is able to buy the goods and pay for them after shipment of goods
Bank Guarantee (BG)
A bank guarantee is when a lending institution promises to cover a loss if a borrower defaults on a loan.
A bank guarantee is a type of financial backstop offered by a lending institution. The bank guarantee means that the lender will ensure that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it. A bank guarantee enables the customer, or debtor, to acquire goods, buy equipment or draw down a loan.
There are two types of bank guarantees — Direct or indirect:
A direct guarantee is one where a bank is asked to provide a guarantee by its account holder, in favour of the beneficiary. Direct guarantees are issued by banks in both domestic and foreign business.
In an indirect guarantee, a second bank issues a guarantee in return for an already issued guarantee. When the second bank suffers losses when a claim is made against a guarantee, the issuing bank will make sure that it compensates all the losses. Indirect guarantees are commonly issued when the subject of the guarantee is a government agency or another public entity.
Guarantees provide comfort to the beneficiary; in case the applicant fails to meet his obligations (either financially or by performance) as per the contract made between the applicant and the beneficiary, the beneficiary will have the guarantee to turn to for payment.
Examples of Bank Guarantees
Because of the general nature of a bank guarantee, there are many different kinds:
✓ A Payment Guarantee assures a seller the purchase price is paid on a set date.
✓ An Advance Payment Guarantee acts as collateral for reimbursing advance payment from the buyer if the seller does not supply the specified goods per the contract.
✓ A Credit Security Bond serves as collateral for repaying a loan.
✓ A Rental Guarantee serves as collateral for rental agreement payments.
✓ A Confirmed Payment Order is an irrevocable obligation where the bank pays the beneficiary a set amount on a given date on the client’s behalf.
✓ A Performance Bond serves as collateral for the buyer’s costs incurred if services or goods are not provided as agreed in the contract.
✓ A Warranty Bond serves as collateral ensuring ordered goods are delivered as agreed.
Medium Term Notes (MTN)
A medium-term note (MTN) is a note that usually matures in five to 10 years. A corporate MTN can be continuously offered by a company to investors through a dealer with investors being able to choose from differing maturities, ranging from nine months to 30 years, though most MTNs range in maturity from one to 10 years.
By knowing that a note is medium term, investors have an idea of what its maturity will be when they compare its price to that of other fixed-income securities. All else being equal, the coupon rate on an MTN will be higher than those achieved on short-term notes. For corporate MTNs, this type of debt program is used by a company so it can have constant cash flows coming in from its debt issuance; it allows a company to tailor its debt issuance to meet its financing needs. Medium-term notes allow a company to register with the Securities and Exchange Commission (SEC) only once, instead of every time for differing maturities.
Benefits of Medium-Term Notes
MTNs offer investors an option between traditionally short-term and long-term investments. This can be ideal for situations where the investor’s goals fall into a time frame beyond those offered by certain municipal bonds or short-term banknotes without having to commit to the long-term note options. Businesses can benefit from MTNs based on their ability to provide a consistent cash flow from investors. Additionally, businesses can choose to offer MTNs with or without call options.
While the rates associated with call options are often higher, the business maintains the right to retire or call the bond within a specified period of time before the bond reaches maturity. This allows businesses to take advantage of lower rates, should they occur before a bond series has reached maturity, by calling in the bond issue and then issuing new bonds at the lower rate. Non-callable options do not have the same level of risk regarding the duration of the investment, which leads them to be offered at lower rates.
Options Available in Medium Term Notes
Investors looking to participate in the MTN market often have options regarding the exact nature of the investment. This can include a variety of maturity dates as well as dollar amount requirements. Since the term involved in an MTN is longer than those associated with short-term investment options, the coupon rate will often be higher on an MTN while being lower than the rates offered on some longer-term securities.
Standby Letter of Credit (SBLC)
A standby letter of credit (SBLC) is a legal document that guarantees a bank’s commitment of payment to a seller in the event that the buyer–or the bank’s client–defaults on the agreement. A standby letter of credit helps facilitate international trade between companies that do not know each other and have different laws and regulations. Although the buyer is certain to receive the goods and the seller certain to receive payment, a SBLC does not guarantee the buyer will be happy with the goods.
How a Standby Letter of Credit Works
A SBLC is most often sought by a business to help it obtain a contract. The contract is a “standby” agreement because the bank will have to pay only in a worst-case scenario. Although an SBLC guarantees payment to a seller, the agreement must be followed exactly. For example, a delay in shipping or a misspelling a company’s name can lead to the bank refusing to make the payment.
The recipient of a standby letter of credit is assured that it is doing business with an individual or company that is capable of paying the bill or finishing the project.
In the worst-case scenario, if a company goes into bankruptcy or ceases operations, the bank issuing the SBLC will fulfill its client’s obligations. The client pays a fee for each year that the letter is valid. Typically, the fee is 1% to 10% of the total obligation per year.
Advantages of a Standby Letter of Credit
The SBLC is often seen in contracts involving international trade, which tend to involve a large commitment of money and have added risks.
For the business that is presented with a SBLC, the greatest advantage is the potential ease of getting out of that worst-case scenario. If an agreement calls for payment within 30 days of delivery and the payment is not made, the seller can present the SBLC to the buyer’s bank for payment. Thus, the seller is guaranteed to be paid. Another advantage for the seller is that the SBLC reduces the risk of the production order being changed or canceled by the buyer.
An SBLC helps ensure that the buyer will receive the goods or service that is outlined in the document. For example, if a contract calls for the construction of a building and the builder fails to deliver, the client presents the SBLC to the bank to be made whole. Another advantage when involved in global trade, a buyer has an increased certainty that the goods will be delivered from the seller.
Also, small businesses can have difficulty competing against bigger and better-known rivals. An SBLC can add credibility to its bid for a project and can often times help avoid an upfront payment to the seller.