A Guarantee or Bank Guarantee (BG) is a type of guarantee from the bank or a financial institution. The guarantor assures that the liabilities of a debtor will be met in a stipulated time. In short, if the debtor fails to settle a debt, the guarantor will cover the claim. A bank guarantee allows the business or a consumer, or debtor, to acquire goods, services, participating in a tender bid, or to buy equipment or draw down a loan. A guarantee is a tool for a company or a consumer, by helping the business to grow and encouraging entrepreneurs.
A Bid Bond or Tender Guarantee is issued as an initial portion of the bidding process participated by the contractor, supplier or services to a project, a Bid bond widely used in government projects where the number of participants applies for a selective tender to get awarded under the bidding terms.
A Performance Guarantee or Performance Bond or Contract Bond is issued to a one-party after the tendering process awarded to the contractor or a supplier of goods or services, It is an assurance from the bank, or financial institution or insurance company in favor of a beneficiary by request of an applicant, a Performance bond utilized to support the beneficiary who are concerned about the prospect, that the applicant might become insolvent or otherwise incapable to fulfill the contractual obligations. In the event of bankruptcy, the beneficiary receives compensation from the guarantors’ bank or institution, It may reduce financial stress or other damages caused by the applicant.
ADVANCE PAYMENT GUARANTEE
Advance Payment Guarantee or Advanced Payment Bond is a bank guarantee where an issuer (bank) undertakes the obligation to draw an advanced payment to the buyer, when the seller debts and fails to deliver the goods or services, and it guarantees that the advance payment will be returned to the buyer or the beneficiary during this occurrence.
Warranty bond is a guarantee issued by a bank or a financial institution, A commitment of guarantee between the buyer and seller or between the contractor and the investor, It promises the buyer or an investor if any defects occurred during the warranty period will be repaired or replaced. Warranty bond mostly utilized in Construction, EPC, other heavy and consumer goods industries.
Letter of Indemnity or Indemnity bond is an instrument guaranteeing contractual provisions, that are intended to reimburse the holder for any actual or claimed loss caused by the issuer or a third party. An indemnity bond acts as coverage for loss and its financial adjustments will be made by the principal to the beneficiary or obligee. An indemnity bond often used by businesses to request reimbursement for lost shares.
Rental guarantee promises payment to a landlord in case a tenant defaults. Rental guarantees are a notable tool to protect industrial and commercial landlords to benefit if their client’s default.
Confirmed payment order is an irrevocable obligation to pay the beneficiary. It is a conditional demand for payment upon the successful completion of a project or a service.
Payment guarantee grants the supplier with financial security in case the applicant fails to pay for goods or services supplied. This will be applicable mostly on an open account basis, to avoid the country’s risk and to cover debts. This means verbiage or wording in the guarantee will vary depends upon the debt agreement between the defaulter and beneficiary. The defaulter has to oblige according to the agreement which was finalized by both parties. Mostly payment guarantee can be asset-backed and pre-approved by the issuing bank.
Letter of Credit
A documentary or commercial letter of credit is a payment mechanism in international trade and issued by the bank or a financial institution. The applicant (buyer) opens an LC to the seller (beneficiary) to limit the risk and follows the payment terms as directed by the issuing bank. If the buyer defaults, the issuing bank will take the authority to oblige the beneficiary’s demand.
At sight letter of credit (LC) is a quick payment method, Once the issuing bank receives the documents from the advising bank. The buyer needs to pay the seller to release the documents to clear the shipment. This type of LC is an advantage for the seller to collect the payment immediately.
USANCE or DEFERRED
The Usance or Deferred Payment – Letter of Credit is payable at a proposed date after the conforming documents are presented by the seller to the advising bank. This type of LC has a privilege for the buyer to extend the payment schedule to collect the documents from the issuing bank and payable before the maturity date as agreed by both parties.
STANDBY LETTER OF CREDIT
The Standby Letter of Credit (SBLC) is an irrevocable guarantee or a commitment issued by the bank or a financial institution. A promise to the beneficiary to pay on behalf of the applicant. SBLC’s are very much alike documentary letters of credit, their main difference is that unlike DLC’s, they only become operative in case the applicant defaults, then the beneficiary in whose favor the SBLC was issued, can draw on the SBLC and demand payment.
SWIFT is a transactional messaging tool for banking and financial service institutions, It’s a global singular network tool for all communication and processes. FIN MT format messages are covered for Wire transfer and all letter of credit and guarantee drafts.
READY WILLING AND ABLE (RWA)
Ready Willing and Able (RWA) or Bank Comfort Letter (BCL) is a drafted document issued by the banks or financial institutions on behalf of its clients, showing intent and ability both financially and legally to enter into a financial transaction. These letters issued to our clients, usually via MT799 message.
PROOF OF FACILITY (POF)
Proof of Facility (POF) is a certificate that shows that a person or a company has the line of credit or a facility to participate in a business deal. It is often applied during the initial negotiations between the participants who are unknown to each other, POF carries a sincerity between the parties to get involved.
Our institution and bank do the due diligence of an applicant if approved our bank quotes the proof of facility, which will be presented during the finalization of a transaction with the beneficiary.
Note: For Proof of Facility (POF)
Con artists seldom use proof of facility to scam the beneficiaries. When agreeing to present with a POF from your parties kindly do the due diligence and thorough investigation before accepting or entering into a contract.