Contractual and financial agreements require a guarantee or security that the obligation will be fulfilled. The backup plan comes in the form of a standby letter of credit. It substitutes what your bank would offer as guarantee for a project or a financial transaction that relies on goodwill to deliver.
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 bank issuing the guarantee knows your contractor or supplier and can easily recover the money in case he defaults. It has evaluated his creditworthiness and known how much they can cover. This makes it difficult for the contractor to default since he will face penalties.
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.
Political unrest is likely to have caused the assets of your contractor to be frozen. Disagreements might arise causing the project to stall. You will require a mechanism to recover your money. This is provided by the bank issuing the credit guarantee. Some contractors are also dishonest and intentionally fail to deliver on their contracts. It is easier for the bank to follow-up the cash.
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.
Standby letters are mainly used for domestic trade while commercial letters suit international trade environment. It is the bank that issues you with the letter under certain terms and conditions. It does not matter the scale of contract you are handling. The safest and most prudent way to do business is to ask for a guarantee.
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 bank issuing the guarantee knows your contractor or supplier and can easily recover the money in case he defaults. It has evaluated his creditworthiness and known how much they can cover. This makes it difficult for the contractor to default since he will face penalties.
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.
Political unrest is likely to have caused the assets of your contractor to be frozen. Disagreements might arise causing the project to stall. You will require a mechanism to recover your money. This is provided by the bank issuing the credit guarantee. Some contractors are also dishonest and intentionally fail to deliver on their contracts. It is easier for the bank to follow-up the cash.
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.
Standby letters are mainly used for domestic trade while commercial letters suit international trade environment. It is the bank that issues you with the letter under certain terms and conditions. It does not matter the scale of contract you are handling. The safest and most prudent way to do business is to ask for a guarantee.
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