. Aim Spa Deutschland GmbH | SBLC Bank Guarantee Monetization

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What is Bank Guarantee (BG)?

A bank guarantee is typically a statement from the bank to take over the liabilities of the insured in the event of failure to make payment. It is similar to a loan. It is usually preferred in cross border transactions. This enables the firms/ buyers to purchase goods/services which they might not be able to afford in the ordinary course of business for expansion or order fulfilment purposes. Bank guarantees enable firms to lower their financial risk and conduct transactions that might help them to expand their businesses. There are basically two types of bank guarantees – Financial guarantee and Performance guarantee. The financial guarantee only covers the financial commitment of the debtor. The performance guarantee covers aspects such as default in performance.

What is Standby Letter of Credit (SBLC)?
SBLC was first introduced by the US. Standby Letter of Credit (SBLC/SLOC) is similar to a bank guarantee as it protects the buyer in case of default at the time of payment by covering his/her liability. It works on the principle of uberrimae fidei, which means utmost good faith. SBLC might require collateral at times. In SBLC, a bank only pays in the worst-case scenario because it is the lender of last resort. It is mostly used in long-term contacts. It has limited scope as it only covers the liability of the beneficiary, i.e., the person who has been given the guarantee. It does not protect both parties. But is usually involves two banks, and the payment is covered by the third party and the primary bank. It can be discounted like a letter of credit, and the seller can get paid beforehand as well. It is a very flexible tool and is used widely in international transactions as it provides more security due to the involvement of two banks. Similar to the bank guarantee, SBLC is also of two types, financial and performance. Financial SBLC focuses on ensuring that the payment is made. In contrast, performance SBLC focuses on ensuring that the criteria of work decided upon are being fulfilled, e.g., time, quality of work, etc.

What is Letter of Credit (LC)
A letter of credit (LC), also known as a documentary credit or bankers commercial credit, or letter of undertaking (LoU), is a payment mechanism used in international trade to provide an economic guarantee from a creditworthy bank to an exporter of goods. Letters of credit are used extensively in the financing of international trade, where the reliability of contracting parties cannot be readily and easily determined. Its economic effect is to introduce a bank as an underwriter, where it assumes the counter-party risk of the buyer paying the seller for goods.

Trade Finance
Trade Finance is the financing of goods or services in a trade or transaction from a supplier through to the end buyer. Trade Finance includes a variety of financial instruments that can be used by an importer or exporter. The terms Import Finance and Export Finance are used interchangeably with Trade Finance. Trade finance facilitates the growth of a business by securing funds required to purchase goods and stock. Managing cash and working capital is critical to the success of any business.

Wealth Management
Wealth management is an investment advisory service that combines other financial services to address the needs of affluent clients.

Medium Term Note (MTN)
A medium-term note (MTN) is a note that usually matures in five to 10 years. A corporate MTN can be continuously offered by a company to investors through a dealer with investors being able to choose from differing maturities, ranging from nine months to 30 years, though most MTNs range in maturity from one to 10 years. MTNs offer investors an option between traditionally short-term and long-term investments. This can be ideal for situations where the investor’s goals fall into a time frame beyond those offered by certain municipal bonds or short-term banknotes without having to commit to the long-term note options.