2006-10-05 22:52:14 · 3 answers · asked by sreenivasalu B 1 in Business & Finance ➔ Credit
A letter of credit is issued, based on a company's credit and business history, by an agency who is willing to guarantee loans made to the company. It acts as credit insurance when a new business has insufficent colateral to secure a loan.
Credit insurance is a risk management tool that can help protect the company's commercial accounts receivable from the effects of loss caused by the insolvency or protracted default of the buyers.
2006-10-05 23:08:34 · answer #1 · answered by kidd 4 · 0⤊ 0⤋
A Letter of Credit is a binding document that a buyer can request from his bank in order to guarantee that the payment for goods will be tranferred to the seller.
Basically, a letter of credit gives the seller reassurance that he will receive the payment for the goods. In order for the payment to occur, the seller has to present the bank with the necessary shipping documents confirming the delivery of goods within a given time frame. It is often used in international trade to eliminate risks such as unfamiliarity with the foreign country, customs, or political instability.
A bank guarantee and a letter of credit are similar in many ways but they're two different things. The main difference between the two credit security instruments is the position of the bank relative to the buyer and seller of a good, service or basket of goods or services in the event of the buyer's default of payment. These financial instruments are often used in trade financing when suppliers, or vendors, are purchasing and selling goods to and from overseas customers with whom they don't have established business relationships.
A bank guarantee is a guarantee made by a bank on behalf of a customer (usually an established corporate customer) should it fail to deliver the payment, essentially making the bank a co-signer for one of its customer's purchases. Should the bank accept that its customer has sufficient funds or credit to authorize the guarantee, it will approve it. A guarantee is a written contract stating that in the event of the borrower being unable or unwilling to pay the debt with a merchant, the bank will act as a guarantor and pay its client's debt to the merchant.
2006-10-05 23:16:23 · answer #2 · answered by Indira Naidu 1 · 0⤊ 0⤋
It is a granter of payment from a bank.are finance company.They usually have the amount that they will guarantee.
2006-10-09 09:32:20 · answer #3 · answered by George K 6 · 0⤊ 0⤋