Contractual and financial agreements require a guarantee or security that the obligation will be fulfilled. The backup plan comes in the form of a standby letter of credit. It substitutes what your bank would offer as guarantee for a project or a financial transaction that relies on goodwill to deliver.
Service delivery, shipment and construction industry players are the greatest beneficiaries of this guarantee. The guarantee is issued by a bank by stating that it will release an amount worth of the contract in case anything happens. They provide a cushion that you are covered in case of breach of contract. For international transactions, the letter should come from a bank operating in both jurisdictions.
The financial institution of bank that provides the guarantee knows the client and his credit worth. This makes it easy to recover money through attaching assets or his accounts in case payments need to be made. It is an effective way to ensure that your client does not default.
A perfect example is a contractor working in Dubai. The project is supposed to be completed within a set time frame. The letter of credit is issued as a guarantee that the deadline will be met. When this does not happen, the client collects money from the guarantor as compensation for lost time and revenue. This money is used to cover for the cost of hiring another contractor or loss of business.
Contractors and suppliers are likely to breach trust by failing to fulfill their obligation. There are other factors that might lead to breach of contract that are beyond the supplier. A financial crunch or delayed payment by his customers will cause failure. You are cushioned by the bank in such cases.
There are cases where suppliers or contractors go out of business before fulfilling their contractual agreements. As a client, you do not have the mandate or capacity to attach their assets and recover your money. It is likely that you do not have the resources either. The process of recovery is also likely to cost you a lot of money and time. Banks have the infrastructure, mandate and the network to make such a recovery.
Political unrest is likely to have caused the assets of your contractor to be frozen. Disagreements might arise causing the project to stall. You will require a mechanism to recover your money. This is provided by the bank issuing the credit guarantee. Some contractors are also dishonest and intentionally fail to deliver on their contracts. It is easier for the bank to follow-up the cash.
The client has to fulfill certain obligations before the letter is granted. His creditworthiness must be to the tune of the contract or more. When claiming reimbursement, you must show proof that the contract was not fulfilled and thus you deserve payment. Such a guarantee is only executed in extreme and very rare cases.
Most of the cases that require a standby letter involved domestic trade. International transactions use commercial letters. The bank has its own conditions of issuing the guarantee. This is the best safety net in business instead of relying on goodwill which could lead to losses once breached. It reduces your exposure to losses regardless of your trading environment.
Service delivery, shipment and construction industry players are the greatest beneficiaries of this guarantee. The guarantee is issued by a bank by stating that it will release an amount worth of the contract in case anything happens. They provide a cushion that you are covered in case of breach of contract. For international transactions, the letter should come from a bank operating in both jurisdictions.
The financial institution of bank that provides the guarantee knows the client and his credit worth. This makes it easy to recover money through attaching assets or his accounts in case payments need to be made. It is an effective way to ensure that your client does not default.
A perfect example is a contractor working in Dubai. The project is supposed to be completed within a set time frame. The letter of credit is issued as a guarantee that the deadline will be met. When this does not happen, the client collects money from the guarantor as compensation for lost time and revenue. This money is used to cover for the cost of hiring another contractor or loss of business.
Contractors and suppliers are likely to breach trust by failing to fulfill their obligation. There are other factors that might lead to breach of contract that are beyond the supplier. A financial crunch or delayed payment by his customers will cause failure. You are cushioned by the bank in such cases.
There are cases where suppliers or contractors go out of business before fulfilling their contractual agreements. As a client, you do not have the mandate or capacity to attach their assets and recover your money. It is likely that you do not have the resources either. The process of recovery is also likely to cost you a lot of money and time. Banks have the infrastructure, mandate and the network to make such a recovery.
Political unrest is likely to have caused the assets of your contractor to be frozen. Disagreements might arise causing the project to stall. You will require a mechanism to recover your money. This is provided by the bank issuing the credit guarantee. Some contractors are also dishonest and intentionally fail to deliver on their contracts. It is easier for the bank to follow-up the cash.
The client has to fulfill certain obligations before the letter is granted. His creditworthiness must be to the tune of the contract or more. When claiming reimbursement, you must show proof that the contract was not fulfilled and thus you deserve payment. Such a guarantee is only executed in extreme and very rare cases.
Most of the cases that require a standby letter involved domestic trade. International transactions use commercial letters. The bank has its own conditions of issuing the guarantee. This is the best safety net in business instead of relying on goodwill which could lead to losses once breached. It reduces your exposure to losses regardless of your trading environment.
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