Bank Guarantee To Fund Projects
Project owners can apply for lines of credit with their own bank to support the financing of their project. Normally the credit line needs to have some collateral backing it, which is where a bank guarantee letter (BG) can come into play. There are options for project owners to either lease or buy a bank instrument. A bank guarantee such as an SBLC is backed by collateral for one year and one day and then you can decide whether or not you want to renew the lease?. If the bank guarantee isn’t renewed, then it has be returned unencumbered and free of any liens.
When leasing or purchasing a BG from a bank instrument provider, there will always be a fee involved. It is possible to set up an agreement whereby a Monetizer pays for the fee. This has to be made very clear in the agreements. The difference between the purchased and leased amount can be a substantial amount of money. However if using a Closed End Transaction (for project funding,) the fee can be taken care of within the transaction itself.
Open V’s Closed End Transactions
Where transactions can fail is where third party service providers are being used and none of them have pre-agreed arrangements in place. Other points to consider:
- It is very hard to find genuine providers of bank guarantees.
- There are many service providers for BG’s on the internet, it’s quite hard to decipher who is legitimate and who can perform?
Trying to source providers can be VERY risky, it can also be a waste of time and be an expensive way to do business. You have to be incredibly diligent and very careful in who you deal with in this area of finance using Bank Guarantees. The internet is fraught with those who proclaim that they obtain BG’s whereas more often than not they are only seeking fees.
The same can hold true when looking for SBLC monetizers and traders. This is why where all possible if you find a ‘closed ended transaction’ whereby all service providers are already in agreement with each other as opposed to trying to source each service provider individually (open ended) this would be an advantage. Common pitfalls for applicants who do not understand how BG’s work:
- People don’t realize that one service (Provider) has to dovetail the other (Monetizer), eg; one party may not recognize the other. All of a sudden you have a bank instrument with no-one to go to to monetize and/or trade it, leaving yourself a hefty bill.
- The wording on the BG is not suitable for Monetization and designed specifically for commerce.
- Time left on the BG for Monetization
Another case in point, Monetizers block the bank instruments when they go into trade. You can not physically pass on a leased instrument to trade with. The trader will not trade a bank instrument if they have not agreed to do so with the monetizer.
Bank Guarantee Process
The image below represents just one example of the Bank Guarantee process from applying through us to receiving the BG.
Bank Guarantee Security Methods
International bank guarantee providers, monetizers and traders all work in tandem with each other for the purpose of funding projects. Each part of the transaction process work as a whole by having pre-arranged agreements with one another. By having pre arranged agreements with Providers, Monetizers and Traders working in tandem with one another, will this helps a great deal help towards minimizing risk during any part of the financial transaction. We call this a ‘close ended’ transaction.
Click here if you want to learn more about SBLC’s and how they work.
Where all possible, safe guards have been put in place to ensure maximum protection of client’s money. (Issuance and monetization of a bank guarantee.) For example; banks will adhere to ICC banking rules as well, will operate under the regulatory framework within the country the operate in. That and depending on what process we are utilizing, there may be insurance bonds put into place to protect client’s funds.
There re are many options when applying for a Bank Guarantee, whether you pay the SWIFT fee or not to levels of comfort you need that the Provider will perform. As with Closed End Transactions, it is the best way to manage the issuance and monetization of a Bank Guarantee. Additional layers of security are added to help streamline the process.
One security approach is to use a solicitor/lawyer service to put the fees into an escrow account (POF) working on behalf of the beneficiary approved by the Provider. The fees are not handed to the provider until a pre-advice MT799 has been delivered by SWIFT. Another approach is we align ourselves with an underwriter who is able to insure the capital. In other circumstances, if the Provider can not cannot perform, you will have an agreement in place that the fees will be returned. There’s always some kind of paper trail and it is standard practice that receivers will get a hard copy of the SBLC once all fees have been remitted. As a company we are not risk takers and therefore work with service providers who have done their utmost to put safety measures in place to minimize risk to the best of their ability.
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