Modern requirements for the organization of foreign economic activity of enterprises provide for the need to build effective schemes for international settlements in order to avoid the emergence of various external and internal risks.
The main one is the risk of loss of own funds. In practice, in recent years, more and more attention has been paid to such forms of securing obligations under foreign trade contracts, such as a standby letter of credit monetization.
Standby Letter of Credit Monetization
A standby letter of credit is a type of documentary letter of credit that represents the obligations of the issuing lease BG SBLC providers to the beneficiary. These obligations may relate to the need to refund money that was received by the ordering party, or the return of an advance payment that was made to the ordering party. Another case may consist of the requirement to pay according to the obligation of the applicant if he did not fulfill it for some reason.
Below are examples of using such a tool:
• If the seller and the buyer have entered into a contract, according to which the seller is obliged to provide the buyer with any services or deliver goods, the seller may require additional guarantees for the fulfillment of obligations to pay for goods and/or services by the buyer. The lease BG SBLC providers in this case give the seller confidence that if the buyer does not pay the money, the lease BG SBLC providers will pay it – that is, the bank that issued this standby letter of credit or provided a bank guarantee.
• If the seller sells the goods to the buyer and under the terms of the contract the buyer is obliged to make any advance payment to the seller, then the buyer can demand from the seller additional guarantees that the goods will be delivered in full and on time according to the terms of the contract, otherwise the advance payment must be returned to the buyer. A standby letter of credit in this case also acts as a form of additional security for the seller’s obligations.
In both cases, the beneficiary, as it were, transfers the risk of non-payment or non-compliance with the terms of the contract to a third party – the financial intermediary, which issues this standby letter of credit. This standby letter of credit serves in the future to protect the Beneficiary from risks.
When working in the market, it is very important to understand the difference between standby letters of credit and ordinary documentary letters of credit. The main difference lies in the nature of the obligations guaranteed to the beneficiary. So, when using a documentary letter of credit, the beneficiary must submit documents in full compliance with the terms of the letter of credit, which indicate that the shipment of goods was made in full compliance with the terms of the contract. For a standby letter of credit monetization, the beneficiary must submit a document that indicates that the applicant has not fulfilled his obligation to the beneficiary.
The Hanson Group Of Companies 