Documentary Settlements and Bank Guarantees
Documentary settlements are financial instruments used daily by many trading and industrial companies, which, when used effectively, can efficiently finance company's activity.
What is the documentary collection?
The documentary collection is a means of settlement when a seller, having forwarded the goods, presents commercial and/or financial documents through a bank for the buyer to pay/accept them. Having paid the commercial documents (invoices, transportation documents, certificates, etc.) or having undertaken to pay the financial documents (having accepted a draft), the buyer receives them from the bank and acquires the right to the goods.
When does the bank release the documents to the buyer?
- The bank releases documents to the buyer against payment.
- The bank releases documents to the buyer against acceptance of the draft.
When is it advisable to secure payment by means of a documentary collection?
- When trading partners do not have complete trust in one another.
- When the seller trusts the buyer's ability to pay and his intention to pay for the goods forwarded.
- When the political and economic situation in the buyer's country is stable.
How does settlement by documentary collection work?
- The seller and the buyer conclude an agreement where settlement by means of documentary collection is provided for.
- The seller forwards the goods to the buyer.
- The seller presents the documents to its bank for collection.
- The seller's bank forwards the documents to the buyer's bank.
- The buyer's bank, after the seller has paid the documents or has undertaken to pay them (having accepted the draft) releases the documents to him.
- The buyer's bank transfers the money to the seller's bank.
- The seller's bank transfers the money to the seller.
What is documentary letter of credit?
A documentary letter of credit is a commitment of the bank issued at the request of the buyer to pay the seller of goods a certain amount, after the latter has submitted documents to the bank, which comply with the conditions and terms of the letter of credit. A letter of credit can be used to pay not only for the delivered goods but also for the works performed or services rendered.
When is a letter of credit used?
- When trading partners do not know or know insufficiently one another.
- When the seller doubts the buyer's ability to pay.
- When trade agreements are concluded with partners from politically instable or economically weak countries.
- When the laws of the country require that.
- When there is a possibility to receive financing under favourable conditions.
How does settlement by a letter of credit work?
- The seller and the buyer sign an agreement in which they provide for settling accounts by means of a letter of credit.
- The buyer applies to its bank with request to issue a letter of credit.
- The buyer's bank issues a letter of credit and forwards it to the seller's bank.
- The seller's bank advises the seller about the letter of credit.
- The seller forwards the goods to the buyer.
- The seller submits the documents specified in the terms and conditions of the letter of credit to its bank.
- The seller's bank forwards the documents to the buyer's bank.
- The buyer's bank examines the documents and if they comply with the terms and conditions of the letter of credit, it debits client's account for the documents value and forwards documents to the buyer. The buyer acquires the right to the goods.
- The buyer's bank transfers money to the seller's bank.
- The seller's bank credits the seller's account.
What are conditions for issuing a letter of credit?
- The bank issues a letter of credit after the client has deposited money in the account that is specially opened for that purpose.
- The bank issues a letter of credit after the client has mortgaged other movable or immovable property (the client is given the credit line).
What is the bank guarantee?
The bank guarantee is the obligation of the bank to pay a certain amount of money or part thereof if the client of the bank for whom the bank guaranteed fails to fulfill its obligations to the beneficiary of the guarantee.
The guarantee is an abstract obligation of the bank, which does not depend on the contract.
What guarantees does the bank issue?
- Performance guarantee.
- Payment guarantee.
- Bid bond (tender bond).
- Advance payment guarantee.
- Loan repayment guarantee.
- Customs guarantee.
- Others.
| If you want to find more information about documentary settlements and bank guarantees, call +370 5 266 4712 in Vilnius or send an electronic query. |
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