buyer's credit
This query is : Resolved
11 April 2008
what is difference between buyer's credit and bank guarantee in banking field? How buyer's credit works?
12 April 2008
buyer's credit is a financing provided to a buyer to pay for the supply of goods or services usually by an exporting country or by the supplier company and is basically Insurance coverage for loans by banks to foreign buyers of exports.
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12 April 2008
A bank guarantee and a letter of credit are similar in many ways but they're two different things. The main difference between the two credit security instruments is the position of the bank relative to the buyer and seller of a good, service or basket of goods or services in the event of the buyer's default of payment. These financial instruments are often used in trade financing when suppliers, or vendors, are purchasing and selling goods to and from overseas customers with whom they don't have established business relationships.
A bank guarantee is a guarantee made by a bank on behalf of a customer (usually an established corporate customer) should it fail to deliver the payment, essentially making the bank a co-signer for one of its customer's purchases.
A bank guarantee is more risky for the merchant and less risky for the bank.
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.
Banks accept full liability in both cases. With a bank guarantee, a client can default and the bank assumes the liability
A bank guarantee is a guarantee made by a bank on behalf of a customer (usually an established corporate customer) should it fail to deliver the payment, essentially making the bank a co-signer for one of its customer's purchases.
A bank guarantee is more risky for the merchant and less risky for the bank.
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.
Banks accept full liability in both cases. With a bank guarantee, a client can default and the bank assumes the liability
12 April 2008
A letter of credit is a document issued mostly by a financial institution which usually provides an irrevocable payment undertaking (it can also be revocable, confirmed, unconfirmed, transferable or others e.g. back to back: revolving but is most commonly irrevocable/confirmed) to a beneficiary against complying documents as stated in the Letter of Credit. Letter of Credit is abbreviated as an LC or L/C, and often is referred to as a documentary credit, abbreviated as DC or D/C, documentary letter of credit, or simply as credit (as in the UCP 500 and UCP 600). Once the beneficiary or a presenting bank acting on its behalf, makes a presentation to the issuing bank or confirming bank, if any, within the expiry date of the LC, comprising documents complying with the terms and conditions of the LC, the applicable UCP and international standard banking practice, the issuing bank or confirming bank, if any, is obliged to honour irrespective of any instructions from the applicant to the contrary. In other words, the obligation to honour (usually payment) is shifted from the applicant to the issuing bank or confirming bank, if any. Non-banks can also issue letters of credit however parties must balance potential risks.
The LC can also be the source of payment for a transaction, meaning that an exporter will get paid by redeeming the letter of credit. Letters of credit are used nowadays primarily in international trade transactions of significant value, for deals between a supplier in one country and a wholesale customer in another. They are also used in the land development process to ensure that approved public facilities (streets, sidewalks, stormwater ponds, etc.) will be built. The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client, and the advising bank of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if any. In executing a transaction, letters of credit incorporate functions common to giros and Traveler's cheques. Typically, the documents a beneficiary has to present in order to avail himself of the credit, are commercial invoice, bill of lading, insurance documents. However, the list and form of documents is open to imagination and negotiation and might contain requirements to present documents issued by a neutral third party evidencing the quality of the goods shipped.
The LC can also be the source of payment for a transaction, meaning that an exporter will get paid by redeeming the letter of credit. Letters of credit are used nowadays primarily in international trade transactions of significant value, for deals between a supplier in one country and a wholesale customer in another. They are also used in the land development process to ensure that approved public facilities (streets, sidewalks, stormwater ponds, etc.) will be built. The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client, and the advising bank of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if any. In executing a transaction, letters of credit incorporate functions common to giros and Traveler's cheques. Typically, the documents a beneficiary has to present in order to avail himself of the credit, are commercial invoice, bill of lading, insurance documents. However, the list and form of documents is open to imagination and negotiation and might contain requirements to present documents issued by a neutral third party evidencing the quality of the goods shipped.
12 April 2008
How it works:
Imagine that a business called the WAPRO from time to time imports steel from a business called MIL, which banks with the India Business Bank. WAPRO holds an account at the Commonwealth Financials. WAPRO wants to buy $500,000 worth of merchandise from MIL, who agrees to sell the goods and give WAPRO 60 days to pay for them, on the condition that they are provided with a 90-day LC for the full amount. The steps to get the letter of credit would be as follows:
WAPRO goes to The Commonwealth Financials and requests a $500,000 letter of credit, with MIL as the beneficiary.
The Commonwealth Financials can issue a LC either on approval of a standard loan underwriting process or by WAPRO funding it directly with a deposit of $500,000 plus fees between 1% and 8%.
The Commonwealth Financials sends a copy of the LC to the India Business Bank, which notifies the MIL that payment is ready and they can ship the merchandise WAPRO has ordered with the full assurance of payment to them.
On presentation of the stipulated documents in the letter of credit and compliance with the terms and conditions of the letter of credit, the Commonwealth Financials transfers the $500,000 to the India Business Bank, which then credits the account to the MIL by that amount.
Note that banks deal only with documents under the letter of credit and not the underlying transaction.
Many exporters have misunderstood that the payment is guaranteed after receiving the LC. The issuing bank is obligated to pay under the letter of credit only when the stipulated documents are presented and the terms and conditions of the letter of credit have been met accordingly.
Imagine that a business called the WAPRO from time to time imports steel from a business called MIL, which banks with the India Business Bank. WAPRO holds an account at the Commonwealth Financials. WAPRO wants to buy $500,000 worth of merchandise from MIL, who agrees to sell the goods and give WAPRO 60 days to pay for them, on the condition that they are provided with a 90-day LC for the full amount. The steps to get the letter of credit would be as follows:
WAPRO goes to The Commonwealth Financials and requests a $500,000 letter of credit, with MIL as the beneficiary.
The Commonwealth Financials can issue a LC either on approval of a standard loan underwriting process or by WAPRO funding it directly with a deposit of $500,000 plus fees between 1% and 8%.
The Commonwealth Financials sends a copy of the LC to the India Business Bank, which notifies the MIL that payment is ready and they can ship the merchandise WAPRO has ordered with the full assurance of payment to them.
On presentation of the stipulated documents in the letter of credit and compliance with the terms and conditions of the letter of credit, the Commonwealth Financials transfers the $500,000 to the India Business Bank, which then credits the account to the MIL by that amount.
Note that banks deal only with documents under the letter of credit and not the underlying transaction.
Many exporters have misunderstood that the payment is guaranteed after receiving the LC. The issuing bank is obligated to pay under the letter of credit only when the stipulated documents are presented and the terms and conditions of the letter of credit have been met accordingly.
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Guest
Guest
(Expert)
17 July 2011
Buyers Credit is arranging funds using Letter of Comfort / Undertaking (a type of bank guarantee).
Where as Bank Gaurantee has different forms like performance gaurantee, financial gaurantee, Letter of Comfort etc.
On process follow of buyers credit you can refer below link which gives details information
http://buyerscredit.wordpress.com/service-offerings/buyers-credit/
Where as Bank Gaurantee has different forms like performance gaurantee, financial gaurantee, Letter of Comfort etc.
On process follow of buyers credit you can refer below link which gives details information
http://buyerscredit.wordpress.com/service-offerings/buyers-credit/
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