Trade Finance Instruments
To ensure economic stability and business development, there are numerous trade finance solutions available. Among them, factoring, bank guarantees, and letters of credit have gained particular popularity. What advantages do they offer to businesses?
The primary collateral in factoring is usually is the right of claim against the buyer, which the customer assigns to the bank. Factoring allows companies to obtain immediate funds that can be used for business development, supplier payments, or other financial needs.
Key advantages of factoring
- Improved liquidity: Factoring allows companies to have immediate access to funds, enhancing their liquidity and enabling more flexible financial management.
- Risk reduction: Transferring accounts receivables to the factor helps companies reduce the risks of unpaid invoices and bankruptcy, because factors usually conduct credit checks on customers.
- Enhanced operational efficiency: Factoring can help companies by taking over tasks related to managing accounts receivables. Factors handle payment collection and customer service, allowing companies to focus on their core business.
How it works at TBB pank?
- The client submits a factoring application to the bank and provides the necessary documents.
- The bank makes a decision and enters into a factoring agreement with the client.
- The client issues a copy of invoice for the delivered goods or services to the buyer, with notice that the receivables have been assigned to TBB Leasing.
- The client provides the invoice along with delivery proving documents to TBB liising.
- TBB liising provides an advance payment to the client’s bank account in the agreed amount.
- Upon the payment due date, the buyer pays the invoice in full to TBB liising’s settlement account.
- TBB liising transfers the reserve to the client’s bank account, deducting the expenses.
Letter of Credit (L/C)
A letter of credit is a payment guarantee provided by a bank to the seller. When using letters of credit, the bank commits to pay the letter of credit’s amount to the seller in accordance with the terms of the contract between the seller and the buyer, in case if the seller presents documents that fully comply with the letter of credit’s terms. Letters of credit provide security for both parties, eliminating the risks of non-payment.
Key advantages of letters of credit
- Guaranteed payment: letters of credit provide sellers with a guaranteed payment from the bank, helping build trust and foster long-term relationships with customers.
- Risk reduction: using letters of credit helps reduce the risks of non-payment and fraud. The bank assesses the buyer’s financial reliability and the terms of the transaction before issuing the letter of credit.
- International transactions: letters of credit are widely used in international trade, where participants are in different countries and subject to different legal and financial systems. Letters of credit facilitate the payment process.
How it works at TBB pank?
- The bank’s client and the seller agree on the terms of the trade transaction and that payment for the goods will be made using a letter of credit.
- The client submits an irrevocable documentary credit application to the Bank and provides the transaction-related necessary documents.
- The Bank makes a decision. As collateral from the buyer, a cash deposit in the amount of the letter of credit may be accepted, or the Bank may consider offering the buyer a credit line for the letter of credit amount, or if such a credit line already exists, increasing it to cover the transaction.
- The Bank drafts the text of the letter of credit according to the buyer’s instructions and sends it to the seller’s bank.
- The seller’s bank verifies the authenticity of the letter of credit and notifies the seller of the received letter of credit.
- The seller checks the letter of credit’s text, ensuring it conforms to the agreement with the buyer, and presents all the necessary documents specified in the letter of credit to their bank, confirming that they have fulfilled the letter of credit’s conditions.
- The seller’s bank then forwards the documents to the Bank, where they are checked for compliance with the letter of credit’s terms.
- The Bank confirms acceptance of the documents and transfers the agreed-upon amount to the seller’s bank’s correspondent account.
- The Bank delivers the document package to the buyer.
Bank guarantees are the bank’s commitment to pay a certain amount to the beneficiary if the client fails to fulfill its obligations. They are used in various situations, such as participating in tenders, executing contracts or securing loan obligations.
Key advantages of bank guarantees
- Building trust: a bank guarantee demonstrates the company’s financial reliability and stability, which helps establish trusted relationships with partners and customers.
- Participation in tender: many tenders require the presentation of a bank guarantee to participate in the competition. This allows companies to expand their business by accessing new projects and contracts.
- Protection of interests: a bank guarantee protects the interests of the seller, providing the opportunity to receive compensation in case the client breaches its obligations.
How it works at TBB pank:
- The client submits a bank guarantee application to the Bank and provides the necessary documents.
- The Bank makes a decision, enters into a guarantee agreement with the client, and issues the guarantee letter.
- Upon receiving a claim from the seller, the Bank pays the amount under the guarantee letter and makes a demand against the client.
The choice of a specific financing tool depends on the company’s needs and objectives, and using the right combination of them can help the business achieve financial success and growth. To find out which of these tools is suitable for Your company, please contact us at firstname.lastname@example.org, and we will find a proper solution based on Your expectations.