The international and the local business practice generated a several types of guarantees (both nostro and loro), which are used most frequently.
Letter of Intent is a non-binding document in which a bank expresses its willingness to issue guarantees for its client’s needs based on the necessary documentation and in compliance with legal and bank regulations.
The following parties are involved in the process:
A bank guarantee is a reliable security instrument in domestic and foreign trade.
It mitigates various types of risk:
While negotiating a contract, the importer requests the exporter to provide a guarantee which will ensure a certain phase of negotiations (e.g. bid, advance payment).
The exporter (applicant) applies to his commercial bank to issue a guarantee in favour of the importer (beneficiary) for a specified amount and specified validity period.
In case of a contract breach by the exporter, the importer submits a demand for payment under the guarantee through the advising bank.
Performance guarantees for:
Payment Guarantees ensure that beneficiaries will be paid in timely manner for the delivered goods and/or provided services. The amount of a payment guarantee depends on the value of the underlying contract, but it could also be lower. The validity of the payment guarantee depends on time needed to implement the underlying contract and timely delivery goods or services.
Payment guarantees are issued for the following purposes:
Customs guarantees are a security instrument used for temporary import of goods. If imported goods are not exported within a given time limit (regardless of re-export or product finalization), while applicable customs duties have not been paid for such goods, customs authorities will collect the receivables from the guarantee.
Customs guarantees may have the following forms:
a) individual guarantees for:
b) comprehensive guarantees for:
A first demand guarantee has a minimum of three participants:
This type of tripartite structure guarantee is known as a direct guarantee, because the issuing bank (the guarantor) issues the guarantee directly to the beneficiary, without an involvement of other banks. For direct guarantees in foreign trade , the issuing bank is seated in the applicant's country, while the beneficiary is located in a different country.
A counter-guarantee is issued if the buyer does not accept security in the form of a demand guarantee issued by the seller's/contractor's bank. The underlying contract will envisage that the guarantee must be issued by a bank in the buyer's country or in a third country. Regardless of the fact whether the issuing bank is in the beneficiary's country or a third country, such guarantee will be an indirect one, i.e. quadrilateral.
Nostro (Import) guarantee - a guarantee issued by a bank at the request of a local or foreign legal entity or private individual (importer), in favour of the seller of goods/services.
Loro (Export) guarantee - a guarantee issued by a bank (local or foreign) at the request of its client (applicant), in favour of the exporter/beneficiary .
Applicant – a local or foreign entity importing goods/services and giving an order to the bank to issue a guarantee.
Beneficiary – a local or foreign entity exporting goods/services in whose favour the guarantee is issued.
Counter-guarantee –any signed obligation, regardless of its name or description, undertaken by the counter-guarantor toward the other counterparty to issue a guarantee or counter-guarantee and which envisages a payment after presentation of a complying demand for payment under the counter-guarantee issued in favour of the other counterparty.
Counter-guarantor – means a party which issues a counter-guarantee, either in favour of the guarantor or other counter-guarantor and involves a party which acts for its own account;
At first demand – following receipt of a written payment request the bank-guarantor is required to make the payment to the Beneficiary immediately
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