Banking standards and international procedures in transactions

 

 

LOI: Letter Of Intent 

An LOI (Letter of Intent) is not a contract. Letters of intent serve to notify the seller that the buyer wishes to enter negotiations to purchase. They do not contractually oblige either the buyer or the seller to go through with the trade.
Letters of intent should be regarded only as an opening point. Issuing an LOI does not make the buyer culpable for anything written in it. Until a contract is agreed upon and signed, both parties are free to back out of negotiations at any time, and buyers cannot be held liable for statements made in the LOI.
 

SCO: Soft Corporate Offer 

What Does Soft Corporate Offer Mean? It is an offer from a seller stating product specifications as well as his terms and conditions of trade. It usually comes on issuing company's letterhead but may not contain a specific recipient.

 

ICPO: Irrevocable Confirmed Purchase Order

An Irrevocable Corporate Purchase Order (ICPO) is a legally binding document issued by the buyer to the seller, confirming their intent to purchase a specific product or service.18

 

Info: Types, Letters of Credit (L/C, DLC, SBLC)

Letter of credit (Documentary Letter of Credit (L/C, DLC) is the bank’s obligation to pay the seller of goods or services a certain amount of money in the timely submission of documents confirming shipment of goods or performance of contractual services.

Documentary Letter of Credit is one of the most important means of financing in the international trade, as the letter of credit is a tool that removes most of risks as from the buyer (importer) and from the seller (exporter).
Documentary Letter of Credit is very flexible and convenient tool of calculations, which have the widest recognition and acceptance in the world because of the following advantages:

1. For the seller, the letter of credit is convenient because it removes the risk of insolvency of the buyer, because the letter of credit is the unconditional obligation of the bank to pay, regardless of the presence or absence of the bank of the applicant credit. Thus, the letter of credit provides a higher degree of protection of the seller’s interests with payment upon delivery or by collection.

2. For the seller of credit is convenient because it removes the risk of insolvency of the buyer, because the letter of credit – the unconditional obligation of the bank to pay, regardless of the presence or absence of the bank of the applicant credit. Thus, the letter of credit provides a higher degree of protection than the interests of the seller with payment upon delivery or by collection.

3. For the customer, the letter of credit is convenient because it provides greater protection of the buyer’s interests compared to the down payment, and eliminates the risk of unscrupulous sellers, because the letter of credit may be required, among other documents, the documents, issued by independent third parties (Chamber of Commerce, the insurance company, the independent inspector).

4. Availability of “Uniform Rules and Practice for Documentary Letter of Credit”, which are internationally recognized, clearly defining and delimiting the obligations of the parties of the letter of credit, allows advancing the interests of the applicant or beneficiary. Thus, the letter of credit is the bank’s obligation as an independent arbitrator who shall be subject to payment of the letter of credit, regardless of the possible litigation between the parties to the contract.

The principle of autonomy and independence of the letter of credit from the contract is fundamental.

What should be important during choosing a letter of credit:

It is important to define clearly the conditions of the letter of credit: type of the letter of credit, payment conditions of the letter of credit, a list and description of the documents submitted by the payee and the requirements for such documents, the closing date of the letter of credit and the period of submission of documents.

There are the following forms of letter of credit:

Revocable Letters of Credit, which can be changed or canceled by the issuing bank without prior notice to the recipient of funds. Revoke of letter of credit does not create any obligation of the issuing bank to the payee (Article 1094 Civil Code). Nominated bank is obligated to make a payment or other operations on a revocable letter of credit, if at the time of their commission they have not received notice of the change of conditions or canceling credit. A letter of credit is revocable if its text does not explicitly state otherwise.

Irrevocable letter of credit is a firm obligation of the issuing bank to pay money in order and the terms defined by the conditions of the letter of credit, if the documents provided for by it, submitted to the bank specified in the credit, or the issuing bank, and observe the terms and conditions of the letter of credit.

Irrevocable letter of credit guarantees that the exporter will make payment to the performance of its obligations, even if an importer wants to abandon the deal. Therefore, exporter, performing a special order, for which will not be another buyer, chooses exactly this kind of letter of credit.

Irrevocable unconfirmed letter of credit. When making an unconfirmed letter of credit issuing bank, providing a letter of credit, is only party that is responsible for the disbursement to seller. Nominated bank must pay only after receiving the money from the issuing bank. Nominated bank simply acts on behalf of the bank providing credit, so it does not take any risk.

Irrevocable confirmed letter of credit – the obligation of the issuing bank is confirmed by another bank. Confirmation is an additional guarantee of payment from another bank (Bank of the exporter or prime bank).

Bank, confirming letter of credit is committed to pay for documents according to the conditions of the letter of credit if the issuing bank fails to make the payment.

According to the method of payment letters of credit can be divided into the following types of letters of credit:

1. Transferable Letter of Credit (Transferable LC) is a letter of credit, the beneficiary of which is entitled to instruct the advising bank to transfer the letter in full or in part to another person with the preservation of the conditions of the letter of credit. Transferable letter of credit may be transferred only once (if in the Credit otherwise is stated). Prohibition on transfer of letter of credit is not a prohibition on assignment of revenue on it. Letter of credit can be transferred only if it is clearly defined by the issuing bank as a transferable. The term “divisible”, “fractional”, “assignable”, “passed” and others do not give the right to consider the letter of credit as transferable. This type of letter of credit is applied when in the transaction between the seller and buyer the intermediary participates who has a letter of credit opened in his favor and transferred into its own provider. The letter of credit can be transferred only under the conditions specified in the original letter of credit, except for the amount of the credit, the unit price, which can be reduced, as well as the expiry date, the last date for submission of documents after the date of shipment, shipment period, which may be reduced. During transferable letter of credit, the documents should be requested so that they could be used for the initial credit. The use of this type of credit requires caution and a good knowledge of technology.

2. Red clause Letter of credit. The essence of red clause letter of credit is that letter of credit requires the terms and conditions of a special clause, according to which the issuing bank authorizes the nominated bank to make an advance payment of a specified amount to the beneficiary before submitting all the documents under the Credit (prior to shipment of the goods or services). Such clause is included in the letter of credit at the request of applicant. Down payment on red clause letter of credit made by the executing bank under a written obligation of the beneficiary to submit documents in accordance with the terms of the letter of credit. After the submission of all documents executed in full. A letter of credit is named in such way because special clause was done with a red stripe.

3. The letter of credit with Payment at Sight. Beneficiary receives payment upon presentation and verification of documents corresponding to all the conditions of the letter of credit. It is provided a reasonable time for a document check before paying to the issuing bank, confirming bank or an authorized bank.

4. The letter of credit with Deferred payment. Letter of credit with Deferred payment is based on an irrevocable commitment of the issuing bank and / or confirming bank to make payment against presentation of the relevant documents not at the time of presentation of the documents and in the corresponding period of payment, determined by the conditions of the letter of credit. Letters of credit (with Deferred payment and payment by acceptance) may be a more attractive financial instruments to customers prior to the date of payment the buyer can sell the goods and pay the letter of credit, generated profit.

5. Revolving Letter of Credit (Revolving LC) put up on a certain amount, after which it will be used for some time, again exposed for the payment of claims of the beneficiary as many times as is reached set the maximum aggregate limit.

The advantage for the importer is that it can order the product in quantities greater than it needs now, and thus to secure a better purchase price. In this case, the delivery of goods will be divided into certain parties and must be performed at specified intervals. For exporter to ship on a schedule convenient for the importer, usually under the revolving credit indicating the dates of the respective amounts which represent the proportion of the aggregate limit.

Such statement about the date of the equity amounts forces an exporter to ship goods in time in accordance with the agreed schedule, otherwise unused equity amounts simply void, unless otherwise isn’t stipulated in the letter of credit, which is for a further letter of credit they will be impossible to use. In this case we are talking about the “non-cumulative Revolving Letter of Credit.”

If the amounts that were not used in fixed terms for them, however, are allowed to use in the future, in which case we are dealing with a “cumulative Revolving Letter of Credit.”

Revolving Letters of Credit are useful only for transactions in which the same type of product will be delivered at regular intervals to the same counterparty.

6. Stand-by Letter of Credit (Stand-by LC) was developed by the American banking system and performs the same functions as a bank guarantee. Using a Stand-by Letter of Credit is regulated by the ISP98, and UCP 600.

Stand-by Letter of Credit is a bank’s obligation to make payment in the event of default on the part of the Applicant and is a bank guarantee. Typically, this letter of credit is opened in cases where the contract provides for payment for goods by bank transfer or otherwise, not giving an absolute guarantee of payment, and the exporter wants to protect himself, but the bank guarantee is forbidden, then in the contract the parties stipulate that as security the letter of credit will be Stand-by by the importer. Payment under this letter of credit will be made in the event of non-payment by bank transfer or otherwise, in unintended ways, on presentation of documents by the beneficiary and the special statement indicating that the counterparty (applicant for the credit) has not fulfilled its obligations in respect of payment.

The use of the term “stand-by letter of credit” is explicated in such way that the law of some states in the U.S. prohibits banks to provide guarantees, and the International Chamber of Commerce Uniform Rules for Documentary Credits under the influence of U.S. banks recognize the application of these rules for stand-by letters of credit (Article 1). From this position, their use is preferable to a bank guarantee, which are subject to national legislation.

In recent years, access to the banks to provide credit guarantee becomes frequent, which would support the borrower’s obligation to pay to a third party or a promise to fulfill certain contractual obligations. This can be done with the help of letter of credit.

Beneficiary under a stand-by letter of credit is drawn firstly to the applicants for payment and then asks the bank to make a payment. For commercial letter of credit situation is reversed, “the beneficiary receives payment from the issuing bank, without resorting to the buyer for payment.”

Thus, as well as a guarantee, stand-by letter of credit is irrevocable obligation of the bank to pay a specified amount of stand-by letters of credit in the first written demand of the beneficiary in the event of default by a party under the Contract, subject to all conditions of the credit.

7. Back-to-back letter of credit. The letter of credit is opened by the issuing bank at the request of the client-applicant in the event of another open letter of credit in favor of the client, in which he is a beneficiary. In contrast to the transferable letter of credit, basic and back-to-back letter of credit are two legally independent from each other letters of credit, even though both are designed for the same commodity transactions.

Back-to-back letter of credit is effective in cases where the seller does not want the proxy provider to know the end customer, and vice versa. In this case, the terms of a letter of credit opened in the name of the broker, may be moved to credit, which will open in the name of an intermediary third-party transactions, both credits will be run independently of each other, and the terms of a letter of credit may differ if it is necessary.

Middlemen usually use this type of credit.

In the CIS countries to open such credit, the banks require collateral or broker deposits to lower the risks.

Payment mechanism

  1. Importer (buyer) has a guarantee that the bank will not pay for his account if he doesn’t receive documents in accordance with the terms of the letter of credit and is satisfied that received documents by the external signs meet the requirements of the importer.
  2. Banks will deny payment of documents by the importer, if the documents on the goods do not meet the letter of credit, thereby protecting the interests of the importer.
  3. Customer can be sure of receiving payment as soon as he provides the documents to the bank according with the letter of credit.
  4. Customer receives against the shipping documents, specified in the letter of credit, prompt payment (if the letter of credit provides for payment terms – on demand).
  5. Required documents usually include shipping documents such as bills of lading (receipt of shipmaster) goods and transport waybill, duplicate w / a bill showing that the goods have been shipped in accordance with the needs and specification of the buyer.

Letter of credit in most cases is as follows:

  1. Exporter and importer agree to the release of LC (Letter of credit).
  2. Importer (the buyer) with the consent of the exporter (seller) asks his bank to issue a letter of credit. The importer’s bank (the issuing bank) in such case assumes an obligation to pay a fixed amount to the exporter with the condition that the exporter will provide the documents that match the letter of credit for a specified period.
  3. Bank issuing informs the bank of the exporter of the credit.
  4. Bank of the exporter (advising bank informs the exporter that, the letter of credit is issued on his advantage).
  5. Exporter ships the goods, prepares the necessary documents, and send them to the bank for providing in the designated bank.
  6. Designated bank verifies the documents and if the documents are following the terms and conditions of letter of credit, this bank will pay the amount of the documents, but not exceeding the total amount of the letter of credit.
  7. Designated bank sends the documents to the importer’s bank for onward transmission to the importer, who can use them to get the goods.

General advantages of the letter of credit

1. Letter of credit is very flexible computational tool that can be used for payment transactions on a variety deals of clients.

2. Letter of credit is a tool, the rules of using of which are defined in the authoritative international organization, are common and are recognized all around the world. This is beneficial to both customers and banks, as each party of the transaction has a clear understanding of rights, responsibilities, and standard requirements to all participants in the operation.

3. Letter of credit is useful as a tool for short-term financing.

Advantages of the letter of credit for importers

1. Letter of credit may open by own expense of the client, by funds provided by the bank on credit, as well as by providing support by customer to fulfill its obligations (mortgage, deposit).

2. Payment is performed after shipment of goods and delivery of documents.

3. Importer determines a list of the documents against which will be issued payment.

4. Limit the period of providing of the documents and shipment of goods.

Advantages of the letter of credit for exporters

1.To the obligation of the buyer to pay, it is added an obligation of the issuing bank, this liability does not depend on the relationship between the seller and the buyer.

2. If the letter of credit is confirmed, so there is a guarantee of payment from the second bank.

3. Performance of the letter of credit is a guarantee of payment.

The similarities between the letters of credit and guarantees.

1. Letter of credit and guarantee are due to the existence and the need to secure the obligations of partners in a transaction.

2. Letter of credit and guarantee are the bank’s obligation to make payment to the beneficiary against certain documents.

3. Letter of credit and guarantee are paid during the provision to the bank well-defined and clearly understood terms of those instruments of documents.

4. Commercial banks offer guarantees and letters of credit on the base of written confirmation of the presence of obligations in the applicant that are provided by such guarantees or letters of credit (the contract, etc.).

The differences between the letters of credit and guarantees.

  1. Letter of credit is opened with the intention of using it, that is, payment by letter of credit is a phenomenon that occurs during the normal course of events (method of payment). Guarantee is used to ensure obligations and is used if in the process of the implementation of one of the parties of the transaction is not able to meet its own obligations.
  2. Letter of credit is used as a method of payment in one form or another. The guarantee can cover almost any kind of obligations (the advance payment guarantee, performance of contractual obligations, tender obligations, repayment, payment of customs duty, payment of a fine or compensation fixed by the court, the observance of the guarantee period of equipment, guarantee of the payment of court collateral, guarantee of payment of the transfer a football player and many others.) Area of application of guarantee, thus much wider than in credit.
  3. Letter of credit is a transferable tool, as it allows to optimize the calculations between the partners. Guarantee in rare cases can be transferable as all that is required to receive funding under the guarantee is the requirement of payment, which makes it a ground for abuse of this tool.

 

L/C (Letter of Credit)

When concluding transactions, entrepreneurs must decide what form of payment to choose. From a security point of view, a letter of credit is considered the best choice. It is recommended to use it especially in transactions from the higher-risk group. Therefore, its popularity is greater in foreign trade. Due to the associated costs, it is only profitable for larger orders, the total value of which exceeds 30,000. USD. Below we describe what a Letter of Credit (L / C) is.

What is a letter of credit?

It is a written document that binds the buyer, seller and bank. It reduces the risk associated with the settlement of transactions. It protects against a situation in which the importer is insolvent at a given moment. It also protects against his dishonesty. By concluding the letter of credit, the bank undertakes to pay a specified amount to the exporter.

It consists in separating a certain amount of cash from the importer’s bank account. The bank reserves them to cover liabilities to the exporter. The bank may release the recipient of the goods from the obligation to allocate funds. Thanks to this, the importer does not have to freeze its funds. It all depends on the agreement between the individual parties.

In short, a letter of credit also provides a guarantee of payment for the goods and protects both parties against the risk of failure to meet the obligations agreed in the contract. It is the bank’s obligation towards the exporter, taken by the bank on behalf of the importer.

Bank letter of credit

The first is the importer’s bank , also known as the opening bank. It does not analyze the course of the transaction; it only decides whether to implement it based on the documents presented.

The second bank, the intermediary Bank, may have several functions:

  • the advising bank acts as an intermediary between the opening bank and the exporter
  • the negotiating bank checks the documents.
  • the confirming bank commits to or refuses to make a payment to the exporter.

Documentary credit, known in English as documentary credit or documentary letter of credit , is a conditional form of transaction settlement. It can eliminate the transaction risk for both the importer and the exporter.

Compared to documentary collection used in international transactions, a letter of credit is a more expensive form of payment.

How does a letter of credit work?

The buyer always orders a letter of credit. Then the application is examined by the bank. It should be noted that he is not required to open a letter of credit. The final decision depends entirely on the individual assessment of the bank. The institution verifies, first, the credibility of the enterprise, the terms of the contract and whether the contract is feasible. The conditions for its opening are also set (the opening of a letter of credit lasts – depending on the bank – from 24 hours to 3 days).

The customer should be aware that banks are not responsible for the condition of the goods received by the buyer. They only check the compliance of the documents provided with the contract. From the moment the letter of credit is opened, the bank takes responsibility for the payment. The seller must provide the documents within a specified period. Their content must be consistent with the terms and conditions established prior to the opening of the letter of credit. Any deviation, such as a change in the nomenclature (e.g. the use of specialist vocabulary and colloquial language) may result in non-payment of funds.

The creditor’s branch closes the letter of credit within 3 days of receiving the instruction from the importer’s bank. The three-day deadline gives the creditor time to invoice the services already provided. In addition, it is worth noting that the letter of credit does not protect against all types of risk related to the course of the transaction. For example, it does not hedge against currency risk.

Not all banks in the world cooperate in the opening and confirmation of letters of credit. For international trade with China, many banks in China offer a letter of credit service. However, it is worth using the services provided by banks with branches in Poland, i.e. Bank of China and Industrial and Commercial Bank of China.

Who is the letter of credit recommended?

A letter of credit is recommended especially to exporters who:

  • enter into their first contract with a new contractor.
  • enter a completely new or remote market.
  • have doubts as to the reliability and timely fulfillment of the contractor’s obligations.
  • make large deliveries.
  • adhere to the principle of safety above cost.

Benefits for the importer:

  • reduces the risk of receiving defective goods (with the requirement to provide quality certificates)
  • specifies the list of documents required in the letter of credit (they are the basis for payment)
  • ensures timely delivery (letter of credit setting the dates of shipments of goods)
  • possibility of negotiating more favorable terms of the transaction (e.g. better prices, deferred payment terms)
  • protection against unjustified payment of receivables. The amount is transferred only after the bank confirms that the documents comply with the terms of the letter of credit.

Benefits for the exporter:

  • reduces the risk of non-payment or delay.
  • prevents the contractor from withdrawing from the contract or refusing to pay after receipt of the goods.
  • eliminates the risk of changes by the importer.
  • guarantees the receipt of receivables from the bank (upon presentation of documents in accordance with the contract), even in the event of the importer’s insolvency.
  • early withdrawal possible with a discount
  • allows you to make your sales offer more attractive or get a higher price for a good (service) by offering a trade credit, without fear of the risk of non-payment.
  • makes it possible to authorize the intermediary bank to pay the beneficiary an advance before presenting the required documents (advance letters of credit)

Documents necessary for the letter of credit

Timely delivery of documents is as important as their content. A letter of credit is opened for a certain period. Regardless of whether it lasts a month or a quarter, the exporter must complete the documents within the specified time. It should also consider that the bank needs several days to read the documentation. The bank is not obliged to make the payment after the deadline specified in the letter of credit. The most common documents included in the contract:

  • commercial invoice,
  • cargo specification (unless the invoice serves this role),
  • documents confirming the quantity, condition, characteristics of the cargo (certificates, certificates),
  • transport document relevant to the given situation (CMR or international consignment note, CIM or international air waybill, AWB, bill of lading, etc.),
  • certificate of origin,
  • insurance policy,
  • health certificates,
  • a bill of exchange issued by the exporter,
  • other – which may result from specific regulations of the importers or exporter’s country.

It is worth noting that any discrepancies in the documents (other values, typos in the names) may lead to the suspension of the payment. Even if the errors are corrected, the bank may charge liquidated damages. So don’t be trivial.

Types of letters of credit

Letters of credit are divided into the length of the loan, payment method, payment to the seller, forms of settlement. In addition, there is a letter of credit:

  • irrevocable (irrevocable credit ) – is a binding obligation of the bank issuing the letter of credit to the beneficiary; the most common.
  • revocable credit (revocable credit ) – under which the issuing bank reserves the right to cancel or amend the obligation.

It is also possible to agree on a negotiated or confirmed version. What’s the difference?

  • negotiation – the exporter’s bank ceases to be only an intermediary, it becomes the evaluating bank, which enables detection of errors in the documentation even before their actual delivery to the bank issuing the letter of credit.
  • confirmed letter of credit – the most expensive version of the letter of credit, the exporter’s bank has additional obligations, protects against the insolvency of a foreign contractor, the opening bank, as well as an unexpected one, depending on the political, economic and financial situation of the importer’s country.

Costs related to the letter of credit.

A letter of credit is always a paid service. The costs of the letter of credit are higher than the costs of other methods of money transfer. It differs depending on the bank due to the amount of the commission and the minimum amount. The price is negotiable.

The fee for opening a letter of credit usually depends on its value, validity period or the number of documents subject to assessment. It is usually a certain percentage of the sum of funds, the value of which cannot be less than the minimum amount. Confirmation of a foreign letter of credit is usually around 0.15% – 0.3% of its value (minimum PLN 150) quarterly.

The issuing bank of a letter of credit may require certain collaterals. Their amount is even 100-110% of the value of the letter of credit. They are valid for a limited period. The most common security measures are as follows:

  • deposit on the ordering party’s bank account
  • bank guarantee
  • credit
  • promissory note, surety
  • so-called collateral, such as credit plus deposit.

We would like to point out again that due to costs, a letter of credit is beneficial for orders exceeding 30,000. USD $.

 

STANDBY LETTER OF CREDIT (SBLC)

 

A legal instrument issued by a bank on behalf of its client, providing a guarantee of its commitment.
to pay the seller if its client (the buyer) defaults on the agreement

What is a Standby Letter of Credit (SBLC)?

A standby letter of credit, abbreviated as SBLC, refers to a legal document where a bank guarantees the payment of a specific amount of money to a seller if the buyer defaults on the agreement.

An SBLC acts as a safety net for the payment of a shipment of physical goods or completed service to the seller, in the event something unforeseen prevents the buyer from making the scheduled payments to the seller. In such a case, the SBLC ensures the required payments are made to the seller after fulfillment of the required obligations.

A standby letter of credit is used in international or domestic transactions where the seller and the buyer do not know each other, and it attempts to hedge out the risks associated with such a transaction. Some of the risks include bankruptcy and insufficient cash flows on the part of the buyer, which prevents them from making payments to the seller on time.

In case of an adverse event, the bank promises to make the required payment to the seller as long as they meet the requirements of the SBLC. The bank payment to the seller is a form of credit, and the customer (buyer) is responsible for paying the principal plus interest as agreed with the bank.

Summary

  1. A standby letter of credit (SBLC) refers to a legal instrument issued by a bank on behalf of its client, providing a guarantee of its commitment to pay the seller if its client (the buyer) defaults on the agreement.
  2. An SBLC is used in international and domestic transactions where the parties to a contract do not know each other.
  3. A standby letter of credit serves as a safety net by assuring the seller that the bank will make payment for the goods or services delivered if the buyer fails to make the payment on time.

 

Standby Letter of Credit Explained

A standby letter of credit is often required in international trade to help a business obtain a contract. Since the parties to the contract do not know each other, the letter promotes the seller’s confidence in the transaction. It is seen as a sign of good faith since it shows the buyer’s credit quality. Creditworthiness, simply put, is how “worthy” or deserving one is of credit. If a lender is confident that the borrower will honor her debt obligation in a timely fashion, the borrower is deemed creditworthy, and ability to make payment for goods or services even if an unforeseen event occurs.

When setting up an SBLC, the buyer’s bank performs an underwriting duty to verify the credit quality of the buyer. Once the buyer’s bank is satisfied that the buyer is in good credit standing, the bank sends a notification to the seller’s bank, assuring its commitment of payment to the seller if the buyer defaults on the agreement. It provides proof of the buyer’s ability to make payment to the seller.

How an SBLC Works

 

The process of obtaining an SBLC is like a loan application process. The process starts when the buyer applies for an SBLC at a commercial bank. The bank will perform its due diligence on the buyer to assess its creditworthiness, based on past credit history and the most recent credit report. If the buyer’s creditworthiness is in question, the bank may require the buyer to provide an asset or the funds on deposit as collateral before approval.

The level of collateral will depend on the risk involved, the strength of the business, and the amount secured by the SBLC. The buyer will also be required to furnish the bank with information about the seller, shipping documents required for payment, the beneficiary’s bank, and the period when the SBLC is valid.

After review of the documentation, the commercial bank will provide an SBLC to the buyer. The bank will charge a service fee of 1% to 10% for each year when the financial instrument remains valid. If the buyer meets its obligations in the contract before the due date, the bank will terminate the SBLC without a further charge to the buyer.

If the buyer fails to meet the terms of the contract due to various reasons, such as bankruptcy, cash flow crunch, dishonesty, etc., the seller is required to present all the required documentation listed in the SBLC to the buyer’s bank within a specified period, and the bank will make the payment due to the seller’s bank.

Types of Standby Letter of Credit

The two main types of SBLC are:

1. Financial SBLC

The financial-based SBLC guarantees payment for goods or services, as stipulated in the agreement. For example, if a crude oil ships oil to a foreign buyer with an expectation that the buyer will pay within 30 days from the date of shipment, and the payment is not made by the required date, the crude oil seller can collect the payment for goods delivered from the buyer’s bank. Since it is a credit, the bank will collect the principal plus interest from the buyer.

2. Performance SBLC

A performance based SBLC guarantees the completion of a project within the scheduled timelines. If the bank’s client is unable to complete the project outlined in the contract, then the bank promises to reimburse the third party to the contract a specific sum of money.

Performance SBLCs are used in projects that are scheduled for completion within a specific timeline, such as construction projects. The payment serves as a penalty for delays in the project’s completion, and it is used to compensate the customer for the inconvenience caused or pay another contractor to take over the project.

 

 

DTC -Documentary Trade Credit

 

 

Is a “Documentary Trade Credit”…
… the future alternative for letters of credit for the internet?

A documentary trade credit (DTC) is a trade finance substitute for a commercial bank documentary letter of credit. A DTC is issued and negotiated under the same UCP guidelines as a documentary letter of credit; except the funds supporting the instrument are available with a third-party international escrow company instead of a commercial bank.

 

What is a documentary trade credit (DTC)?

A documentary trade credit is a trade finance substitute for a commercial bank documentary letter of credit.  A documentary trade credit is issued and negotiated under the same UCP guidelines as a documentary letter of credit; except the funds supporting the instrument are available with a third-party international escrow company instead of a commercial bank.  A documentary trade credit negotiation uses electronic documents under ICC e-Rules instead of paper.

The cost to the importer for issuing a documentary trade credit is normally a fraction of the cost of a bank documentary letter of credit. The cost to the exporter is zero because there is no advising, negotiation, or reimbursing bank(s) to charging fees. The documentary trade credit is settled using electronic records via the Internet instead of paper. The DTC follows the same ICC UCP guidelines as a bank. A documentary trade credit is fast, low cost, secure, electronic, and without commercial bank involvement. The documentary trade credit is the future of trade settlement between buyers and sellers wanting third party escrow of funds using broadband global Internet, video conferencing anICC e-Rules.

How does a documentary trade credit work?

A buyer and seller agree on a trade transaction defined by a purchase order for goods and services between the parties. A documentary trade credit is issued as the payment method supporting the purchase order with terms and conditions of payment. The DTC is issued in the format of a MT700 SWIFT message normally used for a documentary letter of credit. However, the availability of funds for the DTC found in paragraph 41D of the MT700 format is with the international escrow company instead of a commercial bank.

Who can issue a documentary trade credit?

Any company that trades with another company. The DTC is not a financial instrument, it is an instruction. The DTC is managed under UCP guidelines (The International Chamber of Commerce Uniform Customs and Practice for Documentary Credits). The documentary trade credit is already in use as of 2020. It is envisioned that fintech ecommerce platforms will adopt and expand the use of DTCs. Fintech’s can add video conferencing and e-Rules to their platforms to enhance their services. At present, banks have declined to incorporate Internet video, electronic records, or e-Rules into their trade finance operations since they were first published to the banking industry on 1 April 2002 (over 18 years ago).

Can international trade banks issue documentary trade credits?

Yes, except they would be documentary “letters” of credit.

What are the benefits of using a DTC documentary trade credit?

  1.  A DTC follows e-UCP 600, International Chamber of Commerce Uniform Customs and Practice for Documentary Credits Supplement for Electronic Presentation (e-UCP v2.0) effective 1 July 2019.
  2. DTC can be issued and negotiated by Internet ecommerce platforms.
  3. A DTC uses the universal MT700 format for data fields and nomenclature (Society for Worldwide Interbank Financial Telecommunication).
  4. A DTC beneficiary’s (seller’s) funds are available with a third-party international escrow company under contract with the buyer (applicant) in MT700 paragraph 41D.
  5. A DTC is completely Internet based using electronic records in PDF format using ICC e-Rules under UCP 600 version 2.0 (no paper).
  6. A DTC is payable to the seller within five days or less (UCP 600, Article 14.b).
  7. A DTC has a low flat rate cost to the importer, not a percentage of the transaction value.
  8. A DTC has not cost to the beneficiary (exporter).
  9. A DTC supports Internet ecommerce platforms utilizing video (Zoom), global Internet (Starlink), and e-Rules (ICC eUCP600 version 2.0).
  10.  A DEC follows the Global Business Model methodology for online trade transactions for quotation, shipment, and payment.

What are the drawbacks of using a DTC documentary trade credit?

  1. A DTC is not widely known.  Buyers and sellers are not aware it is available for use.
  2. A DTC requires currency to be placed with an international escrow company.  Many countries do not allow the movement of currency outside of its borders.  Note: some banks issue Letters of credit without cash support and are collections and “letters of credit” in name only.
  3. A DTC requires transparency and due diligence investigation(s) of all principles to the transaction.

Shipments and partial shipments paid fast in days instead of weeks.

Transactions with many containers can be divided into smaller partial shipments requiring smaller cash flow outlays. For example, one hundred CTNs with a value of $1,000,000 can be divided into ten weekly shipments of $100,000 each. Since the payment time for electronic records is less than 5 days (UCP 600, Article 14.b), the seller can receive payment for the first shipment before the second shipment is due to be shipped. Indeed, this is the most important benefit that the Internet brings to trade transactions using ICC e-Rules.

Must funds be escrowed with a third party with a DTC?

Yes.  The documentary trade credit is defined as funds available with an international escrow company under contract with the buyer for the transaction.  The funds cannot be used for any other purpose and must be returned to the applicant (buyer) if the shipment is not made or is non-compliant and the buyer refuses to accept the documents as is.

The need for a documentary trade credit.

The trade finance reality today. Only ten percent (10.8 %) of world trade is supported by a commercial bank’s promise to honor a presentation of negotiable documents made under UCP 600 documentary letter of credit guidelines (18.0 % LC transactions of world trade x 63.0 % non-discrepant presentations = 10.8%). The 89.2% balance of non-LC trade transactions worldwide are a mix of documentary collections and open accounts. Open account transactions are simply collections with usance terms; payable after the goods are delivered to the buyer; thus 90% of trade transactions are paid as collections after shipment and/or delivery. Advance payment (100% deposit), although desirable, is not considered a payment method since there is no exchange of title for money; it is a collection which still must be negotiated after shipment.

Only 10% of trade transactions use an actual credit instead of a collection as the payment method. The worldwide average payment time for a sight letter of credit from the bill of lading date is 24 days. This is a result of couriering paper negotiable documents around the globe with airplanes and trucks. DTC’s use electronic records instead of paper documents and do not require multiple banks or airplanes or trucks.

Summary

The documentary trade credit (DTC) can be used for 10% of world trade not supported with a collection instrument. The disenfranchisement of intermediaries between international buyers and sellers is going to happen. Buyers and sellers will manage their own trade finance credit and collection functions. By the end of 2021, the reality will be global broadband Internet (Starlink/12,000 satellites), global video (Zoom/500 million users), global trade finance internet guidelines (ICC e-Rules for credits and collections), and global bank or non-bank ecommerce platforms (100s). These technologies will provide global capability for import and export companies to issue, escrow, present, negotiate and transact documentary trade payments (collections) and documentary trade credits (credits) without banks. Trading companies already have ready access to the same International Chamber of Commerce e-Rules UCP600v2.0 for credits and URC522v1.0 for collections as any bank. These video, e-Rules and e-Platform technologies were available in 2019 but will permeate the global by the end of 2021 with the advent of universal broadband.

Conclusion

Do I trust the buyer to send the money after I ship the goods and title documents? Or do I send the title documents after my buyer sends the money. The documentary trade credit instrument uses a third-party escrow function under UCP guidelines to protect both the buyer’s money and the seller’s goods. The online documentary trade credit is secure, low cost, and fast. The DTC is designed for the coming acceleration of trade with the expansion of the Internet. Presently, world trade is unaware that this capability is happening; but this will change as it did with penicillin; at first slowly; then rapidly; and then totally.

 

 

T/T - Telegraphic Transfer in International Trade

 

If the samples you receive from the vendor meet your expectations, you plan to place a larger order.
After signing the contract with the supplier, it's time to transfer your money. There are several methods of transferring the amount owed.
one of them is T / T payment, which is often used for contracts with business partners from Asia, Africa, South America.
What is a T / T payment and what is the level of risk with it?

 

What is T/T payment ?

T / T payment, or T / T telegraphic transfer (TT, telegraphic transfer, telex transfer, also referred to as wire transfer ), is one of the payment methods in foreign trade, widely accepted all over the world. In other words, it is a bank transfer, in this case between the importers and the supplier’s banks. Next to L / C (letter of credit) payment, T / T is one of the most popular payment methods, especially in Asia.

The use of telegraphic transfer involves a handling fee that varies depending on the regions and banks. Additional costs are the spread, i.e. the difference between the selling and buying rate of the currency on a given day, and the margin. The transfer is usually completed within 1-7 business days.

Risk when paying T/T

International telegraphic transfer is neither the fastest nor the safest method of transferring money.

In the case of T / T, only the buyer, i.e. the importer, risks. A huge disadvantage of this payment method is the lack of mechanisms that, for example, exist in the SEPA system, protecting the payer from fraud. There is no safe way to make a payment and you should keep this in mind.

For example, the account number to which the transfer should be made may be substituted. When transferring money to such an account, the importer loses money as the payment is not linked to the order.

How to make a payment via telegraphic transfer ?

T / T payment is made from your bank account. You can contact your bank to obtain the form (if not available) and fill it in according to the details provided by the supplier. You can also select T / T as your preferred payment method by placing an order on portals like Alibaba. It is recommended to send a payment confirmation to the contractor.

Each transfer requires the name of the recipient’s bank, the bank’s SWIFT number and the recipient’s bank account number. The SWIFT number is a string of letters and numbers that identifies the institution where the recipient has an account. On the invoice you can find the term BIC (Business Identifier Code), which is in fact a number assigned by SWIFT.

When paying by T / T, please choose who pays the additional fees:

  • SHA (share) means that the importer pays his bank’s handling fee, and the recipient pays his own.
  • OUR indicates that the sending transfer (importer) pays the transfer service for both parties.
  • BEN (beneficiary) charges the recipient (supplier) with the required handling fees.

It is possible to add details of a payment intermediary bank, but you must consider additional costs. A handling fee may be deducted from the amount paid, because of which the recipient of the transfer will receive a reduced amount.

For example, if you have signed a contract with a supplier in China, it is recommended to make a transfer to a corporate account in China. If the supplier provides a private account number instead of a company, the reason may be to avoid taxes. It is possible that this could also be a fraudulent attempt.

Consider before making a transfer to Hong Kong which is a famous tax haven. You should also make sure that the account number you provide identifies the seller’s corporate account. If the account belongs to another company, it is possible that the supplier in question does not have an export license or is only collecting payments from buyers in that account. Unfortunately, in these cases it is difficult to fight for your rights if something goes wrong with the order.
To reduce the likelihood of being cheated, we recommend that you verify the contractor.

How are the payment tranches distributed ?

There are several ways to break down a payment into tranches (paid parts). The first tranche is payable before production starts but after a copy of the commercial invoice has been obtained. The second tranche is realized when the goods are transported, i.e. after the shipping documents are sent. For example, with Incoterms FOB, the T / T payment can be made in parts: as a prepayment and at the time of loading. Usually, it is 30% prepayment and 70% after issuing the Bill of Lading, i.e. after loading the goods onto the ship.

Without paying the advance, the chances of starting production are slim. Especially for the first order, the supplier requires a T / T advance payment. Sub-suppliers are usually paid from this prepayment. The sum can be divided into given proportions:

  • 0/100 (only reliable or privileged buyers)
  • 20/80
  • 30/70
  • 50/50
  • 100/0 (not recommended, production time is usually extended)

What if the payment is “lost” ?

Transfers are not always successful. We present a typical scenario:

  1. The payer’s bank processes the T / T payment request.
  2. The recipient’s bank does not record the transferred amount.
  3. The recipient asks his bank to investigate the matter and the bank does not acknowledge receipt of the transfer.
  4. The recipient asks the payer to ask their own bank to investigate the matter.
  5. The payer’s bank tracks the problem and resolves it, the transfer is made to the recipient’s bank or is canceled and a new payment is made. In the latter case, the handling fees cannot be refunded.

Payments are often blocked by typos, e.g., in the name of the recipient’s company. It is common that the template lacks space to enter the entire company name, which is long, especially in the case of Chinese companies. Depending on the response time of banks and stakeholders, it may take up to two months to resolve the matter.

When should I choose T/T payment ?

For best optimization, use T / T payments for larger orders, only from trusted suppliers. This will reduce unit costs and the likelihood of fraud is low. Performing a telegraphic transfer is a cheaper payment method than a letter of credit, but also less secure.

 

POP : PROF OF PRODUCT

 

Proof of Product is one of the most misunderstood parts of any commodity transaction. The Seller / Producers ability to provide POP varies from commodity to commodity and from transaction to transaction. We will try to explain the difference between POP (Proof of Product) and POPC (Proof of Production Capability). Every Agent should be prepared to explain this difference to the End Buyer. The success of the sale may depend on this. Each industry has its own ability to provide Proof of Product. This ability always depends on the answer to one question: Has the product to be sold already been produced and is physically available to be viewed or surveyed or is the Buyer purchasing future production? In the sugar industry we are always dealing with future production. If a Seller / Agent offers to provide sanitized POP on a product that has not yet been produced, you should walk away from that person immediately.

READY TO SHIP COMMODITIES:

EXAMPLE: Crude oil is already in the storage tank. The mode of operation with crude oil is usually DIP – PAY – SHIP. POP is therefore readily available. The process is similar for minerals and most agricultural commodities. This also applies to Gold and many other commodities. The Seller of any product which does not require processing at the time of sale and is already in storage should be able to provide at least partial Proof of Product.

FUTURE PRODUCTION COMMODITIES

For example: 95% of Brazilian sugar is sold as future production. This applies to all one-year contract order and regular SPOT orders. Production sequence for 12-month contract orders and regular SPOT orders. After the signing of the contract the Seller / Producers Security must be transmitted to the Seller / Producers bank and accepted there. Only after this is security is in place the Seller / Producers work starts: The sugarcane must be purchased for the entire contract. Harvesting and delivery of the sugar cane to the refinery begins. Shipping arrangements are made; vessels and loading docks are booked and reserved. The sugar is produced, checked for quality, and packaged for shipment. The sugar is shipped to the loading port and loaded under supervision of a survey company checked for quantity. All shipping documents and certificates outlined in the sales contract are generated the vessel departs for the destination port. Only at this point POP is available for the first shipment.

WHAT CONSTITUTES PROOF OF PRODUCT (POP)?

Full POP is only available after the vessel is loaded. (Often all documents and certificates are not available for some days after the vessel has departed for the destination port.)

FULL POP DOCUMENTS :

  • A FULL SET OF THE FOLLOWING DOCUMENTS WILL BE ISSUED FOR PAYMENT:
  • OCEAN BILL OF LADING MARKED “FREIGHT PREPAID” AND CLEAN ON BOARD,
    ISSUED TO THE ORDER OF “________________________” AND CONSIGNED TO “___________________”.
  • COMMERCIAL INVOICE (EACH SIGNED IN ORIGINAL AND STAMPED BY SELLER) SHOWING THE COMMODITY NAME, DOCUMENTARY LETTER OF CREDIT NUMBER, B/L NUMBER AND DATE, QUANTITY LOADED, INVOICE VALUE AND LOADING PORT.
  • INSPECTION CERTIFICATE OF WEIGHT AND QUALITY, ISSUED BY SOCIETE GENERALE DE SURVEILLANCE (SGS) (OR OTHER SIMILAR RECOGNIZED INDEPENDENT INSPECTION COMPANY), AT PORT OF LOADING SHOWING KIND, QUALITY AND QUANTITY SHIPPED EVIDENCING THAT GOODS ARE IN FULL CONFORMITY WITH SPECIFICATIONS AND CONDITIONS MENTIONED IN PRESENT CONTRACT.
  • SHIPPING COMPANY STATEMENT CONFIRMING THAT THE AGE VESSEL DOES NOT EXCEED TWENTY (20) YEARS, SEAWORTHY AND FIRST-CLASS P&I CLUB COVERED INSURANCE CERTIFICATE.
  • CERTIFICATE OF CLEANLINESS OF THE SCUTTLES AND THE HATCHES OF THE SHIP CERTIFIED BY A COMPANY OF INSPECTION APPROVED INTERNATIONALLY.
  • CERTIFICATE OF ORIGIN ISSUED BY OR ENDORSED BY CHAMBER OF COMMERCE OF THE COUNTRY.
  • INSURANCE CERTIFICATE COVERING 110% OF THE TOTAL INVOICE VALUE.
  • FUMIGATION CERTIFICATE AND RADIATION CERTIFICATE.
  • PHYTOSANITARY CERTIFICATE INDICATING THAT THE GOODS ARE OF A QUALITY ADAPTED FOR HUMAN CONSUMPTION.
  • PACKING LIST SHOWING GROSS/NET WEIGHT AND NUMBER OF OCEAN BILL OF LADING.
  • BENEFICIARY’S CERTIFICATE CONFIRMING THAT COPIES OF ALL SHIPPING DOCUMENTS WERE SENT TO BUYER’S BANK AND THE HARD COPIES HAVE BEEN SENT BY (DHL) OR SIMILAR.

PROOF OF PRODUCTION CAPABILITY (POPC)

Since no sugar is produced without seller security in place the following documents help the Buyer to confirm that the Seller / Producer has the capability and experience to produce and deliver the sugar purchased by the buyer. This proof of the Seller / Producers capability to produce is standard in the sugar industry. Proof of Production Capability Documents (These may vary from Seller to Seller / Producer)

  • Sellers Business License
  • Refinery Business License
  • Allocation Letter or Allocation Certificate
  • Refinery Profile

PARTIAL PROOF OF PRODUCT (PPOP)

PPOP is only available in exceedingly rare cases. It requires that the sugar is already produced and waiting in a warehouse (usually at the shipping port), waiting for a buyer. This sugar commands a premium price. This sugar is known a Fast-Load or Warehouse sugar. Partial POP is possible in this case.
Partial Proof of Product:

  • The quality and quantity inspections have usually been performed at this time.
  • Warehouse certificates may be available after a sales contract has been signed.
  • Warehouse sugar is always more expensive to cover warehousing and other associated costs.

 

Insurance Surety Bond

 

A surety bond or surety is a promise by a surety or guarantor to pay one party (the obligee) a certain amount if a second party (the principal) fails to meet some obligation, such as fulfilling the terms of a contract. The surety bond protects the obligee against losses resulting from the principal’s failure to meet the obligation.

 

A surety bond is defined as a contract among at least three parties:

  • the obligee – the party who is the recipient of an obligation.
  • the principal – the primary party who will perform the contractual obligation.
  • the surety – who assures the obligee that the principal can perform the task.

Banks and surety companies can issue European surety bonds. If issued by banks they are called “Bank Guaranties” in English and Cautions in French, if issued by a surety company they are called surety / bonds. They pay out cash to the limit of guaranty in the event of the default of the principal to uphold his obligations to the Obligee, without reference by the Obligee to the Principal and against the Obligee’s sole verified statement of claim to the bank.

Through a surety bond, the surety agrees to uphold — for the benefit of the obligee — the contractual promises (obligations) made by the principal if the principal fails to uphold its promises to the obligee. The contract is formed to induce the obligee to contract with the principal, i.e., to demonstrate the credibility of the principal and guaranty performance and completion per the terms of the agreement.

The principal will pay a premium (usually annually) in exchange for the bonding company’s financial strength to extend surety credit. In the event of a claim, the surety will investigate it. If it turns out to be a valid claim, the surety will pay and then turn to the principal for reimbursement of the amount paid on the claim and any legal fees incurred.

If the principal defaults and the surety turns out to be insolvent, the purpose of the bond is rendered nugatory. Thus, the surety on a bond is usually an insurance company whose solvency is verified by private audit, governmental regulation, or both.

A key term in every surety bond is the penal sum. This is a specified amount of money which is the maximum amount that the surety will be required to pay in the event of the principal’s default. This allows the surety to assess the risk involved in giving the bond; the premium charged is determined accordingly.

Surety bonds also occur in other situations, for example, to secure the proper performance of fiduciary duties by persons in positions of private or public trust.

As of 2009 annual US surety bond premiums amount to approximately $3.5 billion. State insurance commissioners are responsible for regulating corporate surety activities within their authorities. The commissioners also license and regulate brokers or agents who sell the bonds.

Contract surety bonds

Contract bonds, used heavily in the construction industry by general contractors as a part of construction law, are a guaranty from a Surety to a project’s owner (Obligee) that a general contractor (Principal) will adhere to the provisions of a contract. The Associated General Contractors of America, a United States trade association, provides some information for their members on these bonds. Contract bonds are not the same thing as contractor’s license bonds, which may be required as part of a license.

Included in this category are bid bonds (guaranty that a contractor will enter into a contract if awarded the bid); performance bonds (guaranty that a contractor will perform the work as specified by the contract); payment bonds (guaranty that a contractor will pay for services, particularly subcontractors and materials and particularly for federal projects where a mechanic’s lien is not available; and maintenance bonds (guaranty that a contractor will provide facility repair and upkeep for a specified period of time). There are also miscellaneous contract bonds that do not fall within the categories above, the most common of which are subdivision and supply bonds. Bonds are typically required for federal government projects by the Miller Act and state projects under “little Miller Acts”. In federal government, the contract language is determined by the government. In private contracts the parties may freely contract the language and requirements. Standard form contracts provided by American Institute of Architects (AIA) and the Associated General Contractors of America (AGC) make bonding optional. If the parties agree to require bonding, additional forms such as the performance bond contract AIA Document 311 provide common terms.

Losses arise when contractors do not complete their contracts, which often arises when the contractor goes out of business. Contractors often go out of business; for example, a study by BizMiner found that of 853,372 contracts in the United States in 2002, 28.5% had exited business by 2004. The average failure rate of contractors in the United States from 1989 to 2002 was 14 percent versus twelve for other industries.

Prices are as a percent of the penal sum (the maximum that the surety is liable for) ranging from around one percent to five percent, with the most credit-worthy contracts paying the least. The bond typically includes an indemnity agreement whereby the principal contractor or others agree to indemnify the surety if there is a loss. In the United States, the Small Business Administration may guaranty surety bonds; in 2013 the eligible contract tripled to $6.5 million.

Commercial surety bonds

Commercial bonds represent the broad range of bond types that do not fit the classification of contract. They are divided into four sub-types: license and permit, court, public official, and miscellaneous.

License and permit bonds

License and permit bonds are required by certain federal, state, or municipal governments as prerequisites to receiving a license or permit to engage in certain business activities. These bonds function as a guaranty from a Surety to a government and its constituents (Obligee) that a company (Principal) will comply with an underlying statute, state law, municipal ordinance, or regulation.

Specific examples include:

  • Contractor’s license bonds, which assure that a contractor (such as a plumber, electrician, or general contractor) complies with laws relating to his field. In the United States, bonding requirements may be at federal, state, or local level.
  • Customs bonds, including importer entry bonds, which assure compliance with all relevant laws, as well as payment of import duties and taxes.
  • Tax bonds, which assure that a business owner will comply with laws relating to the remittance of sales or other taxes.
  • Reclamation and environmental protection bonds
  • Broker’s bonds, including Insurance, Mortgage, and Title Agency bonds.
  • ERISA (Employee Retirement Income Security Act) bonds
  • Motor vehicle dealer bonds
  • Money transmitter bonds
  • Health spa bonds, which assure that a health spa will comply with local laws relating to their field, as well as refund dues for any prepaid services in the event the spa closes.

Courts bonds

Court bonds are those bonds prescribed by statute and relate to the courts. They are further broken down into judicial bonds and fiduciary bonds. Judicial bonds arise out of litigation and are posted by parties seeking court remedies or defending against legal actions seeking court remedies. Fiduciary, or probate, bonds are filed in probate courts and courts that exercise equitable authority; they guaranty that persons whom such courts have entrusted with the care of others’ property will perform their specified duties faithfully.

Examples of judicial bonds include appeal bonds, supersedeas bonds, attachment bonds, replevin bonds, injunction bonds, Mechanic’s lien bonds, and bail bonds. Examples of fiduciary bonds include administrator, guardian, and trustee bonds.

Public official bonds

Public official bonds guaranty the honesty and faithful performance of those people who are elected or appointed to positions of public trust. Examples of officials sometimes requiring bonds include notaries public, treasurers, commissioners, judges, town clerks, law enforcement officers, and Credit Union volunteers.

Miscellaneous bonds

Miscellaneous bonds are those that do not fit well under the other commercial surety bond classifications. They often support private relationships and unique business needs. Examples of significant miscellaneous bonds include lost securities bonds, hazardous waste removal bonds, credit enhancement financial guaranty bonds, self–insured workers compensation guaranty bonds, and wage and welfare/fringe benefit (Union) bonds.

Business service bonds

Business service bonds are surety bonds which seek to safeguard a bonded entity’s clients from theft. These bonds are common for home health care, janitorial service, and other companies who routinely enter their homes or businesses. While these bonds are often confused with fidelity bonds, they are much different. A business service bond allows the bonded entity’s client to claim on the surety bond when the client’s property has been stolen by the bonded entity. However, the claim is only valid if the bonded entity’s employee is convicted of the crime in a court of law. Additionally, if the surety company pays a claim on the bond, they would seek to be reimbursed by the bonded entity for all costs and expenses incurred as a result of the claim. This differs from a traditional fidelity bond where the insured (bonded entity) would be responsible for paying the deductible only in the case of covered claim up to the policy limit.

Penal bonds

The penal bond is another type of bond that was historically used to assure the performance of a contract. They are to be distinguished from surety bonds in that they did not require any party to act as surety – having an obligee and obligor sufficed. One historically significant type of penal bond, the penal bond with conditional defeasance, printed the bond (the obligation to pay) on the front of the document and the condition which would nullify that promise to pay (referred to as the indenture of defeasance the contractual obligation) on the back of the document. The penal bond, although an artifact of historical interest, fell out of use by the early part of the nineteenth century in the United States.