Saturday, September 13, 2014

How To Use The Standby Letter Of Credit To Your Advantage

By Kerri Stout


Guarantees are the safest way to ensure that you do not loose when contractual agreements are breached. A standby letter of credit provides the safety net you require to avoid losses and ensure that you recover your money in case a contract is not honored. Goodwill is not always the best way to approach business.

The industries that commonly use this as collateral include shipment, service delivery and construction. It is issued from a bank or financing institution to confirm that you will still get your payments if the contractor, supplier or service provider fails to honor his obligation. For international transactions, the letter is best issued by a financial institution that is accredited to operate 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.

An example is a contractor engaged in Dubai with a strict construction deadline. The contract also stipulates the quality of work to be done. Delays in completing such a project would lead to huge losses. The owner has to hire another contractor to finalize an abandoned project. It is the bank that reimburses the money to cover for such breach and cushion the investor from loss.

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.

Some suppliers have gone out of business before fulfilling their obligations. It is extremely difficult for a client to recover his money or attach assets because of a limited jurisdiction or resources. The recovery process might require a lot of money, other resources and time. Financial institutions and banks have a legal mandate, the resources and time to recover the funds.

The political environment may cause the freezing of assets owned by your supplier or contractor. When you disagree beyond reconciliation, execution of such a contract becomes difficult. Some contractors are plainly deceitful and dishonest to the point of dishonoring contracts. These circumstances require cushioning to cover for any losses that may arise.

The bank requires its client to fulfill certain conditions before granting the letter. As the claimant, you must produce evidence that the contract was bleached and you therefore deserve the compensation. It is however worth noting that such steps are taken in rare and extreme 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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