What is a bank guarantee? What is the role in financial transactions?






Have you ever heard of Bank guarantee? This is a concept in the banking sector. If you are not in the industry, it is difficult to fully understand. Today we will help you clarify the concept What is a bank guarantee?? And what is the role?



What is the concept of Bank guarantee?


What is a bank guarantee: BG or Bank guarantee means Bank guarantee. This is a type of letter of guarantee issued by a bank. In order to support customers to be guaranteed to buy goods and services more convenient.


In case the customer does not meet the financial conditions. And the financial institution party will have to be the person responsible for paying the fees for the 3rd party. Ensure the legal form of the transaction.



Difference between letter of credit and letter of guarantee


What is the bank guarantee?



  • Letter of Credit: A letter of credit made by a bank, sent to a customer to request the performance of a certain financial obligation. Only when the terms of the letter of credit are properly and sufficiently implemented can further transactions be made. Letters of credit are often used in transactions involving the purchase and sale of goods abroad.

  • Letter of guarantee: Also issued by the bank. But it's not mandatory, it's just that the bank is supporting customers to make transactions more convenient and faster. Letter of guarantee is usually applied in the case of real estate sales and construction.


Learn about 2 forms of payment L/C and DP what are?


L/C and DP are 2 payment methods of Bank Guarantee.


1, Letter of credit (L/C)


When receiving support requests from customers. The bank will consider issuing a Letter of Credit guarantee. This letter represents the bank's commitment. Thanks to the reputation of the bank, the transaction is smoother. L/C payment methods include:



  • Revocable Letter of Credit: A revocable letter of guarantee.

  • Irrevocable Letter of Credit: Irrevocable letter of guarantee.

  • Confirmed Letter of Credit: Type of letter of guarantee with confirmation.

  • Transferable Letter of Credit: Type of transfer guarantee letter.

  • Standby Letter of Credit: Type of standby letter of guarantee.

  • Reciprocal Letter of Credit: Type of reciprocal guarantee letter.


2. Documents against payment (DP)


The feature of the documents against payment form is that there must be sufficient invoices and supporting documents to be able to perform the next transactions. The bank will base on those documents to issue a letter of guarantee.


What documents are needed to open a Bank Guarantee?


What is the bank guarantee?


Since the Bank guarantee service is available, international import and export transactions have become simple and convenient. In particular, the buyer will receive the goods quickly and as intended, even when there are no invoices and documents. However, in order to open a Bank guarantee, all documents are required as listed below:



  • Application form for opening letter of guarantee according to regulations of each bank. For example, if you want to apply for a Bank guarantee from Vietcombank, go to Vietcombank's counter to ask for this form and fill in the information.

  • Sale and purchase contract, signed and red stamped by both parties (buy and sell).

  • Invoices and documents proving the purchase and sale of goods. (A detailed list is included).

  • Apply for debt in original handwritten form, or fill out a form available online.

  • Papers proving that the goods are at the port or place of gathering.

  • Particularly for the form of payment of Documents against payment (DP), it is necessary to have one more commitment to present the original invoice and documents to the bank.


In addition, depending on the regulations of each different bank, the buyer may require the buyer to prepare some other special documents.


Instructions on how to open a Bank Guarantee


Here we will guide you on how to register to open a Bank Guarantee for 2 forms. Specifically, please refer to the details below.


For L/C form



  • Step 1: The buyer goes to the bank to apply for a letter of guarantee.

  • Step 2: The seller delivers the goods and invoices and documents related to the purchase and sale transaction.

  • Step 3: Goods to the gathering place first. But the documents have not arrived yet. Now, the buyer receives a letter of guarantee from the bank and gives it to the intermediary to deliver the goods. The delivery party will hand over the goods to the buyer first even though there is no document. At the same time keep the guarantee letter.

  • Step 4: Invoices are received and delivered to the bank for checking. Buyer goes to the bank to pay and receive the invoice. Then the buyer brings the invoice and documents to the port (shipping party) for them to confirm and get back the letter of guarantee. Finally, the buyer holds a letter of guarantee and returns it to the bank.


Thus, the Letter of credit (L/C) guarantee process has been completed. Through this form, customers can receive goods immediately without waiting for invoices and documents to arrive.


For DP . form



  • Step 1: The seller and the purchaser sign a contract of sale. The buyer then declares the address of the bank receiving the DP guarantee. This is also the bank that will receive the original invoices and documents.

  • Step 2: The goods have been transported to the gathering place, but the documents and invoices have not been returned. Therefore, the goods will be kept and have not been transferred to the buyer. In order to receive the goods immediately, the buyer must ask for the help of the bank by opening a DP guarantee letter.

  • Step 3: The buyer must make a deposit in advance with an amount equal to 100%-110% of the value of the goods. After the deposit is completed, the bank gives the DP guarantee letter to the buyer. The buyer submits a letter of guarantee for the delivery party to keep as evidence.

  • Step 4: After the documents, the original invoice is transferred to the bank. The bank contacts the buyer to receive the documents. The buyer receives the document and gives it to the shipper to check, then receives the letter of guarantee and returns it to the bank.

  • Step 5: Finally, the buyer completes procedures to get back the amount deposited earlier.


Conclusion


Above is all information related to the service What is Bank Guarantee? Hopefully, this knowledge will be helpful to everyone in the process of making international trade and exchange transactions.


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