Bank Guarantee vs. Letter of Credit: What's the Difference?
In this blog post, we will delve into the differences between bank guarantees and letters of credit, shedding light on their respective characteristics, applications, and benefits.
How do specialised Trade Finance companies differ from Banks?
Exporters are increasingly running into cash flow issues as payment cycles lengthen and more importers seek credit terms on payment. If your funds are held up, you won't be able to pay your vendors on time or stock up on materials for future orders. This could stifle expansion and potential, ultimately detrimental to your export business's success.
Exporters often use bank loans to bridge this funding gap. However, bank lines are unsuitable for Trade Finance Service due to the following reasons:
Collateralized:
When you apply for a loan from a bank, they will want you to provide tangible collateral, such as a piece of property or some machinery. You won't be able to have access to bank lines if you don't have any collateral to put up.
Limited:
There is a direct correlation between the value of your fixed assets and the quantity of financing you may get from a bank. However, companies often have sales that are much beyond their fixed assets and need more capital to export their surplus through traditional banking channels. In addition, you'll need access to your locked-up working capital during peak seasons when you may be experiencing additional demand, but banks will only extend your facility.
Read more: https://emeriobanque.medium.com/how-do-specialised-trade-finance-companies-differ-from-banks-69b096d48843#InternationalTradefinance#financialinstitutions#LetterofCredit#BankGuarantee#TradeFinanceService
How do specialised Trade Finance companies differ from Banks?
Exporters are increasingly running into cash flow issues as payment cycles lengthen and more importers seek credit terms on payment. If…
3 Common Types of Trade Finance Products Explained
There are several definitions of trade finance available online, and the terminology employed is intriguing. It is characterised as a "science" and "an imprecise term covering a variety of different activities." Both are correct, as is the nature of these things. Managing the money required for international trade is a precise science. However, within this science, Trade Finance Service has access to a vast range of tools that affect how cash, credit, investments, and other assets can be used for trade.
Common Types of Trade Finance Products:
1. Letter of Credit
A letter of credit is a payment pledge provided by a bank on behalf of the importing client. It's a common trade finance document that you should be familiar with. Essentially, it is a commitment by the bank to pay the exporter the money within a specified time frame and under the terms and circumstances agreed upon.
It enables sellers and buyers to mitigate some of the inherent hazards of international trade, including currency fluctuations, non-payment, and economic instability.
2. Purchase Order (PO) Finance
Purchase Order (PO) financing is intended for SMEs that are experiencing inefficiency in their cash flow. To put it simply, it gives funds to pay suppliers with the validated purchase order in order to ensure seamless cash flow. It enables firms to accept a huge volume of orders while adjusting the lending basis to match their specific requirements.
This is especially true for SMEs, who frequently get a significant amount of orders but lack the necessary working capital to process them. That is exactly what it does. Even if the volume of orders reduces, there are no ties, so you can quit using it whenever you want.
Read more: https://www.emeriobanque.com/blogs/3-common-types-of-trade-finance-products-explained#Tradefinance#letterofcredit#BankGuarantee#supplychainfinance#SMEs#internationaltrade
3 Common Types of Trade Finance Products Explained
Trade finance products can help businesses manage the cost of their imports and exports. Learn about the three most common types of trade finance products.
What Is The Difference Between Bank Guarantee And Letter Of Credit?
Being in international business, you might be very well aware of the concept of bank guarantee and letter of credit but sometimes, it becomes difficult to differentiate between these two as both the terminologies look similar but they are very different from each other. Both the financial instruments are the legal guarantees from the lending institution that the exporter will be paid on-time for delivered goods & services. Plus, both assure that the importer will be able to pay the debt, no matter what the financial circumstances are. But in case, if the buyer is unable to pay, the lending institution will step in and pay the amount. Both instruments provide financial assistance and reduce risk factors and grow global transactions.
Difference Between Bank Guarantee And Letter Of Credit
So, what is the difference? The key difference is that letters of credit are widely used in international trade & transactions due to the risk factors involved in global trade, for example, distance, different laws, and unfamiliarity of the parties to the contract towards one another, etc. While bank guarantees, on the other hand, are often used in real estate and infrastructure contacts to mitigate the credit risks in the domestic market.
Let’s understand the difference between their definitions.
1. What Is A Letter Of Credit?
2. What Is A Bank Guarantee?
Emerio Banque is a legal and private financial institution specializing in international trade finance services, import/ export, letter of credit, and other offshore banking services.
Read more: https://www.emeriobanque.com/blogs/what-is-the-difference-between-bank-guarantee-and-letter-of-credit#letterofcreditandbankguarantee#internationaltrade#bankguarantee#letterofcredit#tradefinanceservices
Difference Between Bank Guarantee And Letter Of Credit?
What Is The Difference Between Bank Guarantee And Letter Of Credit? Let’s understand the difference between their definitions.
