Reply To: Bank Guarantees

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#5127
Tim Bastian

    Interesting topic. Bank Guarantees differ from Letters of Credit in subtle ways.  For instance a letter of credit can be worked out to pay a specific period without a default, whereas the Bank Guarantee will pay the payments only after default by obligator on the note.  A bit more risk for the seller but still a good tool.

    As to the concerns, I would recommend bringing your banker into the discussion at least in an advising capacity. One of the critical differences between a Letter of Credit and a Bank Guarantee is that you are relying on the buyers bank entirely instead of being able to have your banker act in a confirming roll to the process. In recent years there has been a reduction of qualified corresponding banks in some countries and regions which makes it more difficult for your banker to take on the confirming roll in the process. This reduction in corresponding banks is due in no small part to the lack of transparency in some banks and banking markets that creates risk in the area of compliance. I would be hesitant to assume that my ability to vet the counter parties foreign bank is any better than what my bankers analyst are able to provide when they have in some cases, years of experience with the bank and country. Back to your own banker, in any case if you are receiving international payments, your banker must be engaged and have some level of comfort in receiving the payments from the counter-party bank.

    Concerns aside, if you are confident in your due diligence efforts under the various international trade rules, then the Bank Guarantee is better than an international  unsecured open account.

     

     

     

     

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