Your buyer or seller, especially in a foreign market, can pose to be a formidable barrier when it comes to your trade operations. However, when you use tools like a banker’s guarantee or Standby Letter of Credit, the entire trade can function in a hassle-free manner. What this essentially means is that in the event that either party fails to fulfill their contractual obligations, the bank will ensure that the beneficiaries’ payment is honored upon receipt of a claim, in compliance with the terms of the guarantee.
What is the Required Process?
The process begins with the buyer and seller entering into a mutual contract, in line with the requirements of a banker’s guarantee. The parties are the applicant and beneficiary, respectively. The applicant approaches the issuing bank for documentary credit, drawn in favor of the beneficiary. The issuing bank sends instructions to the advising bank in the seller’s country to correspond the letter at the beneficiary’s end. Once the advising bank gives its confirmation, the guarantee is issued and the hard copy of the same is sent to the beneficiary.
Advantages a Letter of Credit to the Seller
With an appropriate banker’s guarantee, the seller is assured that full payment will be honored at the agreed time. It is a method for secure payment, as long as the set conditions are met. It also minimizes collection time. Here, the risk associated with non-payment lies with the bank, as opposed to the beneficiary. Also, on issue, the seller has easy access to any form of financing. It also enables them to transfer the full or partial value to a third party, such as in the case of raw materials or associated spare parts, etc. Also, currency fluctuations are mitigated by such credit documents.
Advantages to the Buyer
It provides security cover for the buyer as well. It ensures that the seller will honor his side of the trade, thereby protecting the buyer from non-performance and damaged goods. He can also instruct the contact to hold safeguards for him, such as good inspection, time of delivery and quality control. Also, the main benefit is that cash is not tied up. The buyer does not have to pay until he receives the title of the goods. Repeated use of this tool helps increase credibility in the international markets.
Thereby, through a banker’s guarantee, the buyer and seller are able to maximize control, mitigate high risk levels and optimize profits in relation to international trade operations.