Financial Standby Vs. Performance Standby Letter of Credit - What is the difference?

 Letter of credit is a legal document issued by the importer's bank in the favor of the importer's guaranteeing beneficiary that the payment will be made or terms & conditions of the contract will be fulfilled by the importer. But in the event, if the importer is unable to do this, the whole or remaining payment will be done by the issuing bank. But a Standby Letter of credit is slightly different.

What Is A Standby LC?

Putting it in simple words, a Standby Letter is also a legal document issued by the buyer's bank guaranteeing payment to the seller but it only activates if one of the parties to the contract defaults on the agreement. For example, if the purchaser does not fulfill the terms & conditions of the contract or does not pay, the beneficiary can activate the standby LC and get compensation from the bank.

Example of Standby LC

As the name suggests, in a Standby LC, the bank is on “Standby mode” in regards to an agreement where it will only have to pay where there is any default. For example, an importer executes a transaction with a foreign vendor to ship 1000 widgets on open credit. To protect payment risk, the vendor requests the importer to deliver a letter of credit as part of their agreement. The importer applies to his bank for a standby LC and due to his sound credibility, the bank issues the letter and forwards it to the sender. Now, if the importer fails to meet terms & conditions, the vendor can submit the proof documents to the importer’s bank and get the payment from the bank. Axios Credit Bank is a popular financial platform offering international trade finance, letter of credit/standby LC, and other offshore banking for corporate imports & exports.

What Is Financial LC?

You can understand the Financial LC as an irrevocable undertaking by the bank guaranteeing the beneficiary that the payment will be done on time for his delivered goods & services by the importer. But if the importer fails to do so, it will be paid by the bank to the beneficiary. The bank makes the payment in full as a financial LC has a 100% conversion factor. Before issuing, the importer’s creditworthiness is evaluated by the bank and for the customers with no so sound credit record, banks can demand collateral or funds on deposit.

What Is Performance LC?

Performance standby LCs are also an irrevocable undertaking by the issuing bank but it is given in regards to paying the beneficiary in case there is a default made by the importer in performing terms & conditions of the contract. In simple words, a performance LC assures the beneficiary that the importer will meet the contractual obligations of the contract but in case if he makes a failure, then the bank will pay 50% to the beneficiary.

Bottom Line

A standby LC is a growing need for businesses dealing in international trade & transactions. It helps the exporters to get assured of receiving payment on-time for their goods & services from the importers. But if for any reason, the payment is not made, they are assured of receiving their payment from the issuing bank. In short, it provides confidence to both the parties dealing in international trade. If you are an international businessman, you can contact Axios Credit Bank to avail of a variety of global trade finance services at affordable rates.

Bank Guarantee Vs Letter Of Credit - Find The Salient Differences

What is the difference between the Bank Guarantee and Letter of Credit? This is the most common question that people involved or dealing with national or international trade have been struggling with for a very long time. And this is not surprising at all. Both of these terminologies look similar and provide similar benefits to buyers and sellers. A bank guarantee and letter of credit both are promises from a bank or financial institution that the sellers would be paid on-time with the full amount in exchange for their services regardless of the financial capabilities of the buyer. In both of these concepts, the bank guarantees and assures the third-party that if the buyers are not capable of repaying, the bank will pay it on behalf of them.

Whenever any businessman wants to deal with import-export business or expand his business in the different corners of the world, he needs assurance from the buyer to get paid on-time after delivery of goods or services. This is done by banks both in case of national and international business but the main difference is that bank guarantees are often used in real estate and infrastructure to reduce the credit risks in domestic markets whereas Letter of Credits is used in other commodity international markets.

To understand the difference between these two, we must understand their definition first. Here we go:

What Is a Bank Guarantee/ Standby Letter Of Credit?

As the name suggests, in these services, a bank gives the guarantee to the beneficiary (Third-party) on behalf of its customer to pay the full-amount on-time in the event of default by its customer ie. buyer. It is a commercial instrument that takes place in public tenders or government-related works in the domestic market. So the bank guarantee has the same functions but in different ways. It is used in mitigating the risks in real estate and infrastructure projects.

Types of Bank Guarantee

• Financial Guarantee
• Performance Guarantee

What is a Letter of Credit?

A letter of credit is a financial instrument issued by the buyer’s bank to the seller to assure on-time payment after the terms and conditions mentioned in LOC are met by sellers. Every letter of credit has certain terms and conditions which are required to be fulfilled by both buyers and sellers for executing the transaction successfully. Here the sellers get guaranteed payment of their sale of goods from the buyer’s bank in case of international trade.

Types of Letter of Credit

• Commercial
• Revocable
• Irrevocable
• Confirmed
• Unconfirmed
• Back-to-Back
• Red Clause
• Transferable
• Un-transferable
  

Key Points Of Differences Between Bank Guarantee And Letter Of Credit:

Basis	Letter Of Credit	Bank Guarantee
Boundary	It takes place in international markets.	It takes place in domestic markets.
Protection	It also protects both the parties but favors sellers.	It protects both the parties but favors buyers.
Parties Involved	5 or more	3
Industry Type	It is used by merchants in international  markets	It is used by parties involved in real estate and infrastructure developers.
Bank Liability	Primary	Secondary
Preference	It gives preference to the fulfillment of the terms and conditions of LOC	It becomes effective only when there is a default made by the buyer in making payments
Payment Time	Bank only pays when the Terms and conditions are met by both the parties	Bank makes payment when the contractual obligations are not fulfilled
Frequently Used In	Import and Export Business	Government-related work

Other Points Of Differences:

• A letter of credit issued by the buyer’s bank to the seller’s bank is an acceptance of the invoices presented by the seller and a guarantee to make payment after the fulfillment of terms and conditions of the agreement. Whereas in the bank guarantee services, the guarantee given by the bank to the beneficiary on the behalf of the applicant will only be effective if there is a default made.
• In a letter of credit, the bank bears the risk of the primary liability where it collects payment from the client afterward anyhow but on the other hand, the banks stand secondary as it will pay only when the buyer is not capable to do so.
• In the case of international trade, the involved merchants in the import and export of goods will consider letters of credit to ensure delivery and payment due to foreign countries and distance issues. In contrast, the contractors who are bidding for real estate or infrastructure projects will ensure their financial credibility through a bank guarantee.

Final Words

A letter of credit is used when there is a high level of risk involved in business globally but with the time, it is also being used in domestic trade. In simple words, it does not matter whether it is a domestic or international market, the buyer always wants to make sure on-time delivery of goods while an assured payment is a seller’s right. Both instruments are there to reduce your risks.

What is Shareholders Agreement : A Complete Guide for Small Businesses

Before understanding what a shareholder's agreement is, we should understand what a shareholder is. A shareholder can be a person, company or organization that holds stocks in any given company. Sometimes they are called stockholders of any corporation that holds one or more shares of stock in the corporation. These shareholders receive declared dividends if the company is earning profits and performing well. They also have a right to vote in the company on certain matters and can also be elected on the board of directors.

What Should Be Included In A Shareholders Agreement?

Introduction to Trade Finance (Import & Export)- Definition, Types, and Benefits

If you are a businessman who is running an international business in different corners of the world, you might be aware of the situation when you need financial help for importing or exporting goods in other countries faster and easier. This is a situation where the concept of Trade Finance comes into the picture. 

What is Trade Finance?

Trade finance is the collection of essential financial instruments and products that are used by financial companies to facilitate finance to global businessmen so that they could perform their international transactions with smooth, ease and comfort. In simple words, trade finance makes it easier and possible for importers & exporters to transact their business through trade. It eliminates or reduces the risks involved in an international business transaction. Trade finance is an umbrella term that means it covers those financial instruments that are being used by many banks and companies to make trade finance transactions feasible.

Trade Finance

There are two concerning parties in Trade Finance:

1. Exporter - who needs payment for their goods and services
2. Importer - Who wants to make sure that their payment is for the correct quality & quantity of goods.