When it comes to business, there are indeed certain risks that come with expansion and growth. This goes the same with trade financing. It can give you great profits if done correctly but it may also bring you bankruptcy if done wrong. And so, you must be very careful in making business decisions especially when it comes to trade financing.
For this reason, banks and financing institutions have come up with a vast range of solutions or financial instruments that can reduce these risks effectively, especially for new international business relationships and transactions. Practically every risk of trade financing already has a tried and tested solution to quickly outwork that risk. And one of the most important financial instruments for risk management or mitigation is a bank guarantee letter.
A bank guarantee letter is actually a line of credit that guarantees reduced losses if a transaction doesn’t go through as planned. It promises and pays a specific amount of money to a beneficiary but unlike a line of credit, this amount is only provided if the opposing party fails what is stated in the contract which is a very safe and very huge advantage for most businesses.
If a buyer gets hold of products from a seller but experiences financial issues that renders him unable to pay the seller, this is when a bank guarantee letter is most recommended. It will be provided and it will indicate that the agreed-upon amount of money will be paid to the seller. Additionally, if the supplier cannot provide the goods or products due to certain circumstances that are out of the supplier’s control like an accident or a disaster, the bank will have to pay the amount that is stated in the contract to the buyer.
Therefore, a bank guarantee letter is both beneficial and advantageous to the seller and the buyer. And it’s widely used in global transactions wherein conditions are much more difficult to control and there are various protocols that tend to impact costs and even hinder the timely delivery of goods as well as payments.
For business that wants to ensure profits at the end of the day and avoid bankruptcy, a bank guarantee letter is an important solution or tool to protect the business and assist them with the right way of trading and export financing. Using a bank guarantee letter is now becoming an efficient and safe instrument offered by banks to help businesses succeed.