The Non-Fund based Credit Facilities are nature of promises made by Banks in favour of a third party to provide monetary compensation on behalf of their clients, where the lending bank does not commit any physical outflow of funds.
What is a 'Letter Of Credit'?
A letter of credit is a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. Due to the nature of international dealings, including factors such as distance, differing laws in each country, and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade. Banks typically require a pledge of securities or cash as collateral for issuing a letter of credit. Banks also collect a fee for service, typically a percentage of the size of the letter of credit. The International Chamber of Commerce Uniform Customs and Practice for Documentary Credits oversees letters of credit used in international transactions.
Guarantee:-
A bank guarantee is a guarantee from a lending institution ensuring the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank covers it. A bank guarantee enables the customer, or debtor, to acquire goods, buy equipment or draw down loans, and thereby expand business activity. A bank guarantee is a lending institution’s promise to cover a loss if a borrower defaults on a loan. The guarantee lets a company buy what it otherwise could not, helping business growth and promoting entrepreneurial activity.
Different Types of Bank Guarantees:- A bid bond prevents companies from tendering bids and not accepting or executing the awarded contract.
What is a 'Letter Of Credit'?
A letter of credit is a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. Due to the nature of international dealings, including factors such as distance, differing laws in each country, and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade. Banks typically require a pledge of securities or cash as collateral for issuing a letter of credit. Banks also collect a fee for service, typically a percentage of the size of the letter of credit. The International Chamber of Commerce Uniform Customs and Practice for Documentary Credits oversees letters of credit used in international transactions.
Guarantee:-
A bank guarantee is a guarantee from a lending institution ensuring the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank covers it. A bank guarantee enables the customer, or debtor, to acquire goods, buy equipment or draw down loans, and thereby expand business activity. A bank guarantee is a lending institution’s promise to cover a loss if a borrower defaults on a loan. The guarantee lets a company buy what it otherwise could not, helping business growth and promoting entrepreneurial activity.
Different Types of Bank Guarantees:- A bid bond prevents companies from tendering bids and not accepting or executing the awarded contract.
- A performance bond serves as collateral for the buyer’s costs incurred if services or goods are not provided as agreed in the contract.
- 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 warranty bond serves as collateral ensuring ordered goods are delivered as agreed.
- A payment guarantee assures a seller the purchase price is paid on a set date.
- 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.