Chapter 6 L G and Stand-by L C n L G

Chapter 6 L/G and Stand-by L/C n L/G – definition A bank guarantee is a written promise issued by a bank at the request of its customer, undertaking to make payment to the beneficiary within the limits of a stated sum of money in the event of default by the principal. A bank guarantee is used as an instrument for securing performance or payment especially in international business.

Chapter 6 L/G and Stand-by L/C classifications l accessory guarantee & independent L/G Accessory guarantee is an accessory contract by which the guarantor undertakes to answer for the debt, default or miscarriage of anther person known as the principal debtor. The guarantor’s obligations are accessory to and dependent on the contract in the respect of which they are given. Independent L/G , independent of the contract; irrevocable; written u Conditional and unconditional bonds. –

Chapter 6 L/G and Stand-by L/C l Conditional and unconditional bonds Unconditional bonds can be called at the discretion of the buyer， demand Guarantees. Conditional bonds can be divided into two types: bonds requiring documentary evidence and bonds not requiring documentary evidence. – parties Applicant: the person at whose request the guarantee is issued;

Chapter 6 L/G and Stand-by L/C Beneficiary: the party in whose favor the guarantee is issued; Guarantor: the bank that issued a letter of guarantee undertaking to make payment to the beneficiary in the event of default of the principal against the presentation of a written demand other specified documents; Instructing party: the party that instructs the guarantor to issue a letter of guarantee on behalf of the applicant by providing counter guarantee. – procedures

Chapter 6 L/G and Stand-by L/C l l l l The principal and the beneficiary sign a base contract; The principal’s bank, the instructing bank, signs a counter indemnity with the principal; The instructing bank provides counter indemnity to the beneficiary’s bank, the guarantor of the bond; The guarantor issues a bond to the beneficiary; If the principal fails to fulfill his obligation, the guarantor pays to the beneficiary; The guarantor asks for and obtains reimbursement from the instructing bank; The instructing bank asks for and obtains reimbursement from the principal.

Chapter 6 L/G and Stand-by L/C types l tender guarantee, or bid bond – Bid bond is an undertaking given by a bank at the request of a tender in favor of a party inviting tenders abroad, whereby the guarantor undertakes to make payment to the beneficiary within the limit of a stated sum of money in the event of default by the principal in the obligations resulting from the submission of tender. l performance guarantee/bond: an undertaking given by a bank at the request of a supplier of goods or services to a buyer, whereby the guarantor undertakes to make payment to the beneficiary within the limit of a stated sum of money in the event of default by the supplier in due performance of the contract between the principal and the beneficiary.

Chapter 6 L/G and Stand-by L/C l advance payment/repayment guarantee: issued at the request of the exporter to the importer when the advance payment is required by the former. l quality/maintenance guarantee l retention money guarantee l customs guarantee l guarantee for compensation trade

Chapter 6 L/G and Stand-by L/C l re-issue guarantee l payment guarantee l deferred payment guarantee l loan guarantee l leasing guarantee l payment guarantee for commission or any other charges

Chapter 6 L/G and Stand-by L/C The similarities between the Banker’s L/G and L/C Bank credit, that is, bank takes the first payment responsibility; document transactions; similar contents. – The difference between the Banker’s LG and L/C: Different applications; Different requirements for documents. –

Chapter 6 L/G and Stand-by L/C n Stand-by – L/C Definition A stand-by letter of credit is a clean letter of credit that generally guarantees the payment to be made for an unfulfilled obligation on the part of the applicant.

Chapter 6 L/G and Stand-by L/C Parties and procedures Applicant, beneficiary, advising bank, and the issuing bank – the relationship between the stand-by L/C and the documentary L/C: l Both of the issuing banks take the first payment responsibility; l Payments are honored against the documents or certificates; l Both of the credits are issued on the base of sale contract or other contract and independent of these contracts. –

Chapter 6 L/G and Stand-by L/C The difference between the stand-by L/C and the documentary L/C: l Under the documentary L/C, the beneficiary can be honored only after performing the obligation and presenting the documents complying to the L/C; under the stand-by L/C, the beneficiary can be honored only if the applicant defaulted; l The documentary credit applies to the goods sales; the stand-by L/C applies to more general transactions; l The documentary L/C generally specifies the transport documents as the prerequisite for payment; the standby L/C generally specifies the default certificate. –

n 不同结算方式的结合使用 ü 信用证与汇款相结合 ——常用于允许其交货数量有一定机动幅度的某些初级产品的交易； ——明确采用的是何种信用证和何种汇款方式，以及信用证支付金额的比例。

ü 信用证与托收相结合 ——信用证规定受益人（出口商）开立两张汇票，属于信用证项下的部分货款凭光票支付，而其余额则将货运单据附在托收的汇票项下，按即期或远期付款交单方式托收。 ——明确信用证的种类和支付金额以及托收方式的种类，且须注明“在全部付清发票金额后方可交单” 。

ü 汇款与银行保函相结合 ——常用于成套设备、大型机械和大型交通运输具（飞机、船舶等）等货款的结算。 ——明确信用证的种类和支付金额以及托收方式的种类，且须注明“在全部付清发票金额后方可交单” 。

Chapter 7 Financing in international settlement n Financing in export – negotiation under guarantee After the exporter ships the goods and presents documents specified in the L/C or other contracts as guarantee, the bank provides the float financing to the exporter. u Negotiation under documentary collection Procedures:

Chapter 7 Financing in international settlement The exporter presents documents and application for negotiation instead of the application for collection to the bank; Once the bank accepted the application, he will credit the client’s account; The remitting bank remits the documents and its own collection instruction to the collecting bank; The remitting bank settles the negotiation account after receiving the proceeds. If the bill is dishonored, the bank can get compensation from the exporter, the drawee, or from the goods.

Chapter 7 Financing in international settlement u negotiation under documentary credit: The exporter ships the goods and presents the documents as guarantee for bank short-term loan. Classifications: Documents as the guarantee; The acceptance of bill as the guarantee; The acceptance of acceptance L/C as the guarantee.

Chapter 7 Financing in international settlement – – discounting of financial documents packing loan or packing financing Definition: The exporter uses the original L/C as the guarantee to apply to the bank for financing the production, packing and transportation. Conditions: The L/C is irrevocable and nontransferable; up to 90% of the L/C amount.

Chapter 7 Financing in international settlement anticipatory credit – Factoring u Definition: – Factoring is a comprehensive financial service，in which, the seller transfers its accounts receivable arising out of commodity sales/service contracts it signs with the buyer now or in the future to the factor (a financial institution that provides factoring service), which will provide at least two of the following services: trade financing, sales sub-account management, call for payment of accounts receivable, and credit risk control and guarantee of bad debts

Chapter 7 Financing in international settlement l Procedures: The exporter applies for an approval to his bank. The exporter’s bank conveys the approval to the importer’s bank; The import factor assesses the importer’s credit and approves the line of credit; The importer places the order on the exporter and settles by D/A or O/A; The exporter delivers the goods to the importer and then presents the documents to the export factor and receives prepayment for about 50 -90% of the account receivable;

Chapter 7 Financing in international settlement The export factor gives documents to the import factor who is responsible to ask for payment to the importer; Importer pays his factor who remits the proceeds to the exporter’s factor; The exporter’s factor settles the account with the exporter.

Chapter 7 Financing in international settlement u Advantages to exporters The seller can get assistance from the factor by latter’s providing an assessment of the creditworthiness of the overseas buyers as well as by latter’s offering credit protection and collection service; The seller will increase sales through factors’ knowledge of the market and ability to offer credit lines;

Chapter 7 Financing in international settlement Advantages to importers It is easier for the importer to purchase on O/A and to save settlement costs; The importer is ensured to receive the goods complied with sales contract. – Forfeiting u Forfeiting provides a source of non-recourse finance through use of drafts, promissory notes or other instruments representing sums due to the exporter, in which, a bank in the seller’s country discounts a note or draft carrying the backing of the buyer’s bank. u

Chapter 7 Financing in international settlement u characteristics: The goods involved in forfeiting are usually capital goods; Forfeiting is a medium-term business in the sense that only those maturities from six months to five or six years are to be considered; The purchase of bills of exchange or promissory notes falling due on same future date by a forfeiter is without recourse to any previous holder if the drawee of the draft or maker of the promissory note fails to pay at maturity;

Chapter 7 Financing in international settlement Forfeiting is a relatively inexpensive and attractive alternative to other forms of export financing for the exporter; Unless the credit standing of the importer is first class, any forfeited bill must carry a collateral security in the form of an aval or an unconditional and irrevocable bank guarantee acceptable to the forfeiter ensuring the holder thereof that the importer will pay it at maturity; The purchase of bills in forfeiting is carried out by discounting, namely by deduction of the interest in advance for the un-matured draft.

Chapter 7 Financing in international settlement u procedures: First, the importer and the exporter signs the sale contract; Second, the exporter applies to his bank forfeiting and gets his bank to quote the discount rate for the paper to be issued; Third, the exporter ships the goods and present documents and a bill of exchange drawn on the buyer, who accepts it for payment at maturity, or the promissory note in favor of the seller issued by the importer. The bill or the promissory notes is generally guaranteed by a bank in the buyer’s country. Fourth, the forfeiting bank discounts the bill and documents on non-recourse terms; Fifth, the forfeiting bank obtains payment directly from the importer on the agreed maturity date.

Chapter 9 Financing in international settlement u disadvantages Costs can be high; It may be difficulty to find an institution that will be willing to be prepared to guarantee the importer’s liabilities. n – financing in import financing under collection Trust receipt is a kind of financing to the importer by transferring the ownership of the goods to the bank. Applies to D/P.

Chapter 9 Financing in international settlement – financing under the L/C l Reduction of security; l Import negotiation: the importer uses the documents as guarantee to borrow from the issuing bank. l The buyer’s usance L/C.