Financial Instruments

What is a Documentary Letter of Credit?

A documentary letter of credit (DLC) is a guarantee issued from a Financial Institution (Bank) to the beneficiary confirming that the issuer will pay the beneficiary funds up to the maximum amount stated in the documentary credit when the beneficiary provides certain documents to the issuing bank.

This financial instrument assures the Beneficiary (supplier) that they will receive payment up to the amount stated in the letter of credit, provided certain compliant documents stated in the DLC are presented to the issuer within the duration of the instrument.

As soon as the beneficiary submits the compliant documents, the Issuer will make the payment. Even if the buyer (applicant) cannot pay for the beneficiary’s services, the issuer is obliged to honor the presentation.

Documentary letters of credit are common tools of trade finance used mostly in international trade, where the purchaser and seller have yet to establish a relationship and/or operate in different jurisdictions. This financial tool is commonly used to mitigate the risk of both the seller and buyer located in a different geographic location enabling trade between the parties to occur were the credit rating of the issuer stands in place of the credit worthiness of the buyer – giving the supplier greater comfort that he will be paid.

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A Standby Letter of Credit (SBLC) is a financial instrument also issued by a financial institution to guarantee payment on behalf of a client in the event of a default.

Standby Letters of Credit are used in a wide range of commercial trade. They are similar to a Documentary Letter of Credit, only difference is they become operative if the applicant defaults on payment. SBLC’s are more related to demand guarantees, which also require that the presentation of stipulated documents be compliant with the terms and conditions of the guarantee. SBLC’s and guarantees are different in terms of protection, they both serve the primary purpose of making sure that sellers get paid, but while a standby letter of credit protects the seller, a bank guarantee protects both sides, since it also protects the buyer in case the supplier never ships the goods or ships them in a damaged condition.

Standby letters of credit are a very flexible tools, making them a suitable product for securing a wide range of payment scenarios. The SBLC’s also take different forms similar to Bank Guarantees i.e

  1. Performance Bond – backs a commitment to perform other than to pay money/funds and includes an obligation to pay for loses occurring from a default of the buyer in the process of completing an underlying transaction.
  2. Advance-Payment Guarantee – supports an obligation to account for an advance payment made by the supplier to the buyer.
  3. Bid-bond or tender-bond – backs an obligation of the buyer to execute a contract if the buyer is awarded a bid.
  4. Back-Back SBLC – backs the issuance of another, separate standby letter of credit or other undertaking by the supplier of the counter standby.
  5. A financial standby – supports an obligation to pay money, including any instrument evidencing an obligation to repay borrowed money.
  6. Insurance Bond – supports an insurance obligation of the applicant.
  7. Commercial Bond – backs the commitment of a buyer to pay for goods or services in the event of non-payment by other methods.
  8. Direct-Pay SBLC – intended to be the primary method of payment. It may or may not be linked to a default in performance or payment.

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  1. Ready Willing and Able (RWA)

It is a financial instrument/ tool issued by banks or financial institutions on behalf of clients, demonstrating intent and capability (both financially and legally) to enter into a financial transaction. RWA’s are often also referred to as bank comfort letters. The RWA for security purposes is sent via bank swift from the issuing bank to the beneficiary bank

How does an RWA work?

We provide ready willing and able (RWA) letters for our clients, usually via SWIFT MT799 message. An RWA confirms that an asset the applicant has with the issuer is good, clear, clean, of non-criminal origin, and is unencumbered.

2. Proof of Funds

It is a financial instrument/tool issued by bank or financial institution that demonstrates that a person/company has the ability and funds available  to enter into a transaction. Its purpose is to ensure that the financial ability required for the transaction is procurable and legitimate. It is often used for funding projects that require large amounts of money to invest in, e.g real estate, power plants etc

How does it work?

Issuance of a proof of funds (POF) towards a beneficiary confirms that the entity/person has the quoted funds available with them. During the course of a transaction, the applicant presents the POF to the beneficiary, assuring them that the buyer can afford the transaction. Another important aspect in the document is its validity. Bringing a transaction of a large scale takes time to bring to a closure, the beneficiary needs to be aware of the date of expiry of the proof of funds, and aim to finalize the transaction before the document expires.

Proof of funds can also be leased. In such cases a client pays a fee and receives a cash deposit into their bank account. When deposited, the funds remain locked and cannot be withdrawn or used by the client, thus safeguarding the asset holder.

It should be noted that proof of funds are sometimes used by con artists to carry out financial scams. In accepting to be presented with a proof of funds, it is crucial to thoroughly investigate the other party to the transaction and running sufficient due diligence checks.

3. Advising of Swift Messages

What is S.W.I.F.T?

SWIFT stands for the Society for Worldwide Interbank Financial Telecommunications. As such it is a messaging network that financial companies and institutions use to securely transmit information and instructions through a standardised system of codes.

Through our affiliates and correspondents who are proud members of SWIFT, we are able to assist financial companies and institutions in relaying their swift messages to the beneficiary institution. Our network has over 200 corresponding relationships with global financial institutions.

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Invoice Discounting also referred as factoring  can be construed as Invoice Financing which is a way for businesses to borrow money based on amounts due from their customers. It is a form of asset-based lending that involves the purchase and collection of your accounts receivable. Invoice financing can solve problems associated with customers taking a long time to pay and difficulties obtaining other types of business credit.
Our Factoring program has the following components

  • Advancing Funds against accounts receivable for cash flow acceleration
  • Collections of accounts receivable
  • Risk & Credit analysis of customers to help you make more informed decisions
  • Credit protection to prevent losses due to insolvent or bankrupt customers
  • Management of your Accounts Receivable Account including reporting and bookkeeping.

Factoring is a way for you to accelerate cash flow and improve collections from customers that owe you money. It’s also a strategy that overcomes the challenge of being unable to obtain a conventional loan because we’ll provide financing based on the creditworthiness of your accounts receivable rather than your financial statements.

EXAMPLE

Let’s say you have issued $1000,000 worth of receivables that won’t be due for another 90 days. Through our affiliates and correspondents and as long as the buyer is US Based, through our affiliates, we can lend  against these receivables as soon as they are created to provide you with up to 80% of their value ($800,000)—speeding up your cash flow and enhancing the ability of your business to grow. You get the balance of the invoice amount when your customers pay, so you incur no long-term debt.

There are financial institutions that may lend against your accounts receivable, but they do not provide the additional services included without additional cost through our factoring program.

Simply put, when you engage us to be your factor, we actually become your accounts receivable department.

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