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Letters of Guaranttee

A letter of guarantee is a financial instrument normally issued by the buyer's bank in which the bank promises to pay money up to a stated amount for a specified period for merchandise when delivered. It substitutes the bank's credit for the buyer's and eliminates the seller's risk. It is used in international trade.

SERVICES

The types of LG's:

Bid Bond:

This is issued for the client who wish to enter a tender. This is an expression of the seriousness of the client towards the tender issuer.

Performance Bond:

This is issued after the tender has been won. It guarantees that the client will perform the tasks specified in the contract. It is also known as the final LG.

GEOGRAPHICAL DISTRIBUTION

Advance Payment:

Is issued upon the request of the client to ensure exploitation of the amount paid to him in advance by the beneficiary, under the expense of funding the implementation of the contract. This guarantee keeps reducing as tasks are implemented.

Shipping Guarantee:

INVESTMENT

This is issued upon the request of the client, who is importing goods, to receive the consignment from the shipping agent in replacement of the original shipping documents.

Foreign Letters of Guarantee (Outgoing):

These LGs are issued in foreign currency and have restricted uses since they are to pay foreign currency obligations outside the country. It can only be issued by the head office under strict central bank regualtions.

Foreign Letters of Guarantee (Incoming):

These LGs are issued by foreign banks instructing the local bank to effect a payment to a local client on their behalf. They are also called Agency LGs.

Securities:

Investment transactions securities.

Bail is to transfer the debt owed to the debtor's guarantor.

It is essential to obtain securities in case the financer needs to liquidate them to recoup finance funds if the financed party has defaulted.

Securities can be a percentage of the requested finance, these depend on:

(1) The type of securities presented.

(2) The stability of the market value.

(3) How active the industry which the financier is part of.

(4) Government regulations, and executive management decisions.

The strongest security is the success of the transaction and its profitability, which was based on the accuracy and scope of the study.

Securities should be valued realistically before being accepted by the bank.

TYPES OF SECURITIES:

First degree securities.

Inventory (Goods stored where the bank instructs).

Mortgage.

Second degree securities.

Personal Effects.

Promissory Note.