London, United Kingdom (PressExposure) February 21, 2012 -- There are various instruments and concepts for trade financing which are already well known in international banking practice and are actively applied. They are an indispensable part of foreign trade. Contractual partners in foreign trade have the option of applying international rules and trade customs in clearing transactions, in particular: the standard guidelines and customs for documentary letters of credit and standard guidelines for payment guarantees. The banking systems makes it possible for importers to use trade financing tools not only as a means of accounting for contracts, but also to use it as a means of procuring cheaper, and more long-term, foreign borrowed funds for the financing of import transactions and the development of business.
The primary tools for short-term trade financing are:
documentary letters of credit.
In the case of long-term trade financing, additional insurance guarantees of Western export credit agencies are employed.
It is important to mention that trade financing opens up additional options to each of the parties in addition to economic benefits. The importer is provided with the option of financing and assuming long-term foreign trade relations, the exporter receives a guaranteed and timely payment from the transaction (in the event all parties observe the contractual conditions) and the banks extend their cooperation in the international banking market, and thus promote foreign trade relationships between their countries.
The different options for the application of various trade financing tools comprise a complex system of mutual commitments which arise between the importer, the exporter and the banks involved. The selection of a specific tool, or concept, for trade financing depends on a lot of factors, among other things upon how the transaction is constructed overall, and to what extent this is acceptable for the bank involved. The effectiveness of the use of various financing concepts, and the amount of risk for the parties, depends upon the scale of the adaptation of the selected tools of international trade financing within the legislation of the countries and banks involved. For this reason not only a financial, but also a legal analysis of the system, selected by the parties is of great significance.
A bank guarantee is an abstract payment commitment of a credit institution, or a bank, in the event that certain requirements are fulfilled. The bank assumes a guarantee that certain circumstances have arisen. In the case of a bank guarantee this can be a possible profit or also a loss, which arises or also does not arise. This means that the bank steps in if a beneficiary from the guarantee suffers a loss because either a negative or disadvantageous event has arisen or a desired profit has not arisen. The bank is obliged to pay upon demand if it is claimed on from the bank guarantee.
The sense and purpose of a bank guarantee is mainly to hedge itself against the non-fulfilment of contractual obligations or the failure to fulfil them in accordance with agreements and thus against a possible loss, or to cover the risk of the negative course of a business transaction of whatever type. The bank guarantee is not a payment tool but a hedging tool which brokers have enjoyed recommending mainly in the field of foreign trade since the 1950s due to its simple use and relatively low cost, and it is used by traders or project developers.
The forms which are most frequently used are the bid bond, the performance guarantee, the supply guarantee or the payment guarantee.
For the bank, a bank guarantee means an abstract liability as it can basically not raise any objections against its payment obligation which is linked to the business transaction of the foreign trade partners this is based on.
In this context reference is made to the abstractness of the guarantee undertaking. The abstract structuring of the bank guarantee is particularly due to the fact that the bank providing the guarantee is not involved in the legal relationship. In the conflict of interests between the client of the bank guarantee on the one hand, and the beneficiary on the other, concerning the realization of the performances, goals and obligations commercially agreed upon, the bank can only act in accordance with its guarantee conditions.