A Letter of Credit (L/C) is a financial agreement between a bank, the bank’s customer (usually an importer), and a beneficiary (usually an exporter). It ensures payment to the beneficiary once the specified conditions are met. Here are the main types of L/Cs: 1/Irrevocable L/C: Cannot be canceled or modified without the seller’s consent. The bank guarantees payment. 2/Revocable L/C: Can be changed or canceled by the bank without notifying the seller. The bank holds no liability after revocation. 3/Stand-by L/C: Similar to a bank guarantee, the bank will pay if the buyer fails to meet payment obligations. 4/Confirmed L/C: Involves an additional guarantee by the seller’s bank, enhancing payment security. 5/Unconfirmed L/C: Only the issuing bank is responsible for payment. 6/Transferable L/C: Allows the seller to transfer parts of the credit to other suppliers. 7/Back-to-Back L/C: Based on a primary L/C, a secondary L/C is issued to intermediaries. 8/Payment at Sight L/C: Payment is made immediately (within 7 days) upon document submission. 9/Deferred Payment L/C: Payment is delayed until a specified date or upon goods receipt. 10/Red Clause L/C: Allows the seller to request an advance before shipping goods.
STANDBY LETTER OF CREDIT ( SBLC) A standby letter of credit, abbreviated as SBLC, refers to a legal document where a bank guarantees the payment of a specific amount of money to a seller if the buyer defaults on the agreement. An SBLC acts as a safety net for the payment of a shipment of physical goods or completed service to the seller, in the event something unforeseen prevents the buyer from making the scheduled payments to the seller. In such a case, the SBLC ensures the required payments are made to the seller after fulfilment of the required obligations.
3/ BANK GUARATNTEE (BG) A bank guarantee is a type of financial backstop offered by a lending institution. The bank guarantee means that the lender will ensure that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it. A bank guarantee enables the customer (or debtor) to acquire goods, buy equipment, or draw down a loan
A blocked fund is defined as money or capital realized when a foreign operation involving the transfer of funds is blocked as a result of regulations imposed by the government of the country where the money was generated. When a fund is suspected to be generated from illegal activities or criminal acts, the government can impose certain regulations hindering the money from being be transferred. The fund then becomes a blocked fund.
A bank draft is a payment on behalf of the payer, which is guaranteed by the issuing bank. A draft is used when the payee wants a highly secure form of payment. The bank can safely issue this guarantee because it immediately debits. the payer’s account for the check, and therefore has no risk.
Proof of Funds (POF) is a letter or documentation that certifies that an individual, institution, or corporation has sufficient funds (money) to complete a transaction. A POF is typically issued by a commercial bank or custody agent to provide confidence or assurance to another party – typically a seller – that the individual or entity in question has sufficient funds to complete an agreed-upon purchase.
A performance bond is issued to one party of a contract as a guarantee against the failure of the other party to meet obligations specified in the contract. It is also referred to as a contract bond. A performance bond is usually provided by a bank or an insurance company to make sure a contractor completes designated projects.
A security bond is a contract between three or more parties: a supplier of some kind, their client and an insurance company. Security bonds guarantee that suppliers can meet financial obligations when contracted performance targets are missed.
A credit facility is a type of loan made in a business or corporate finance context. It allows the borrowing business to take out money over an extended period rather than reapplying for a loan each time it needs money. In effect, a credit facility lets a company take out an umbrella loan for generating capital over an extended period. Various types of credit facilities include revolving loan facilities, committed facilities, letter of credit and most retail credit account.
A single credit transfer is a payment transaction by which payment services provide transfer of funds to a payee order once the payer can be payee himself.