Learn more about the Letter of Credit Discounting Facility

 Every business needs a fund for running its operations, be it for starting a company, expanding a company, purchasing machinery, or working capital needs. The major requirement of finances for many businesses is working capital. Traditionally, most of the working capital financial instruments were secured, where one must have some kind of collateral against the loans. But, now there are unsecured working capital instruments that avail loans even without collateral.

LC Discounting

The letter of credit is the financial document issued by a banker where a guarantee is given by the bank to pay the seller for the buyer’s obligation, in case a buyer fails to make the payment. LC discounting takes away the risk and gives assurance to the seller for the funds. Such an instrument is used in international trade mainly where the buyer and seller are unknown and have to risk a transaction between each other. There is the involvement of majorly 4 parties in such a transaction namely: Exporter, Exporter’s Bank, Importer, and Importer’s bank. The request for LC can be done by both a buyer and seller and the terms and conditions are decided mutually between them.

Features

1. LC Discounting speeds up the cash flow of the business organization and assists in working capital management effectively.

2. The risk of a transaction is resolved by such an instrument and hence gives assurance to both the parties involved.

3. The following are the benefits to the parties.

• The seller gets immediate cash flow for his business

• The buyer gets a credit period for making payments

• The bank receives interest for the said services

4. LC is discounted only after checking the authenticity of the payment from the buyer, which proves that the instrument is safe and secure in funding.

5. LC discounting can be availed by both domestic and international customers, but it is majorly used in international transactions.

6. The relationship between the exporter and importer is developed well and there is a smooth working of the entire procedure.

Process of LC Discounting

1. In the case of a manufacturing or trading company, the sellers may require funds immediately and cannot wait for the due date. In such a case, LC Discounting plays a major role in assistance to eligible sellers.

2. Buyers on-demand from the seller request Letter of credit (LC) from the respective banks before shipment of goods and send the same to the seller/exporter bank.

3. The exporter bank checks the document and communicates the acceptance to the seller.

4. The exporter receives the Letter of Credit and requests discounts.

5. Hence. The bank discounts the LC after deducting the charges or discounting fees. The exporter gets the money and uses the same for his business expenses.

Example

Let us suppose that “ABC Private Ltd” is a company engaged in manufacturing situated in India. The company receives an order of goods from a foreign country “XYZ Private Ltd” which is asking for a credit period of 60 days for the payments of goods. Being unknown to each other, “ABC Pvt Ltd” demands a Letter of Credit from “XYZ Pvt Ltd” and sends it for confirmation towards “ABC Pvt Ltd” who checks the letter and accepts it and can discount the same. By discounting the LC, the seller will get the immediate cash flow and do not have to wait till the end of the credit period.

FAQs

When is the requirement of LC?

The main requirement of LC is when the parties are unknown and have to risk transacting with each other. It is used mostly in international transactions.

Who can avail LC Discounting facility?

All the eligible businesses who are engaged in manufacturing or service industries can apply for such a facility. It can include selling or shipping goods, trading businesses, or other related businesses.

How much is the interest charged for discounting?

The interest/fees depend upon the amount of the transaction, the Credit score of the buyer, the history of the debtor, etc., and vary according to the clients.

What are the documents required for discounting LC?

The documents include shipment and insurance bills and original LC issued by the buyer’s bank.

How does Terkar Capital help you?

Terkar Capital is one such financial consultant that arranges both conventional and non-conventional debt products for their clients. We have a team of experts who constantly help the borrower in all the steps, right from the first meeting to the repayment of funds. Our timely and efficient services make us different from others. So whenever it is raising funds, Terkar capital is ready to serve you at best!

Frequently Asked Questions on Project Funding

 

What is the meaning of Project Finance?

Project Finance is the financing of long-term, industrial projects, infrastructure projects, or public services using a limited recourse financial structure. Project financing addresses the funding requirements for the exclusive project. We can say that in Project funding, the project itself is collateral. When the project is completed, the revenue generated by it will be used to repay the loan. Project financing relies on the project’s cash flow for repayment, with the project’s assets, rights, and interests held as secondary collateral.

 

What are the characteristics of Project Finance?

• Non-recourse Financing

Non-recourse financing means that the borrowers and shareholders of the borrower have no personal liability in case of monetary default. Any recourse the lender may have will be limited primarily or entirely to the project assets if the project company defaults on the debt.

• Project Finance Documents

Project financing requires a detailed project report. This is the most important document to take the proposal ahead. 

• Many Project Participants 

As Project Financing is generally used for the long term, big scaled projects, several project participants are involved. This is helpful for the smooth running of the project financing process. Financial institutions don’t want to be in a position where the failure of one project or one borrower is large enough to cause their failure. Thus, having several project participants is useful. 

• Capital-Intensive Projects 

Project financing involves large amounts of funding because it is generally used to fund major international development and infrastructure projects. Thus, project financing finances capital-intensive projects.

• Special Purpose Vehicle 

The SPV (Special Purpose Vehicle) checks the proceedings of the project and also maintains a line of sight at the assets. After the completion of the project, asset allocation is processed with regard to the Special Purpose Vehicle which monitors all the processes.

• Revenue from the completed project used for Repayment

In Project Financing, the cash flow that the project generates after completion is used to repay the loan.

What is the importance of Project Finance?

In the past few years, global interest in Project FInancing as a tool for economic investment has increased. Project finance helps finance new investment by structuring the financing around the project’s cash flow and assets, without any additional sponsor guarantees.  Project Financing thus alleviates investment risk and raises finance at a relatively lower cost while benefiting the sponsor and investor. 

• Retains Confidentiality 

Financing projects through Project Finance enables the sponsors to retain the confidentiality of vital information regarding the project which is going to be financed and helps them to keep up with the competitive market through competitive advantage.

• Extending the debt capacity 

The debt may not fall on one lending institution or investment firm due to the presence of multiple entities. So the debt capacity increases due to syndication in Project Financing. 

• Free Cash Flow and no conflicts 

Through Project financing, the providers of funds manage the free cash flow that is left over after paying the operational and maintenance expenses and other statutory payments. The project company has a finite life and is limited to the project there are usually no conflicts of interest between investors and the management of the company. 

Project Finance process/ How do you get Project Funding?

Step 1) Pre-Financing 

• Identification of the Project Plan 

In this stage, the lender primarily ensures that the project plan is aligned with the goals of the financial services company. This step includes identifying the strategic plan of the project and analyzing whether it’s reasonable or not. 

• Check and Minimise Risks 

The lender should check the risks involved in the project and if the project has the resources to avoid any risks. Risk management is essential before the lender begins the Project FInancing venture. 

• Analyze the Project Feasibility 

When a lender decides to invest in a project, he should check if the project is financially and technically feasible. This can be done by analyzing several factors in the project.

Step 2) Financing 

• Arranging Finances 

Financing the Project is a crucial part. The sponsor should get a loan from a financial institution whose objectives and goals are in line with that of the project. 

• Negotiation of the Loan

Negotiating is an important part of Project Financing. The lender and the borrower negotiate the funding until they reach a unanimous agreement. 

• Documents and Verification  

The terms and conditions of the loan have to be mutually decided by the lender and the borrower. Once they decide on the terms of the loan, then the documentations take place. 

• Disbursement of the Loan

The borrower receives the funding as and when the negotiations are done and the documentation is completed. 

Step 3) Post-Financing

• Monitoring of the Project 

As the work for the project begins, the project has to be monitored in a timely and organized manner by the project manager. 

• End of the project and Repayment 

After the project has been finished, it is necessary to keep track of the cash flow from its operations. This is because the funds from the cash flow and revenue will be used to repay the project funding.

  

Why Terkar Capital for Project Funding?

At Terkar Capital, we provide consultation for all kinds of investment banking and capital funding. We believe in supporting and creating opportunities for SMEs and large businesses across India. The objective of the company is to reach sectors of MSMEs that are not organized and financially excluded. The goal is to make finances available at a reasonable cost and deliver transparently.

Difference between Bank Guarantee & Letter of Credit

Bank Guarantee Vs Letter of Credit

A Bank Guarantee and a letter of credit are promises from a financial institution. A borrower will actually want to reimburse an obligation to another party, regardless of the account holder’s financial conditions. While different, both bank guarantee and letter of credit, guarantee the third party that if the acquiring party can’t reimburse what it owes, the financial organization will step in for the benefit of the borrower. A Bank guarantee is similar to a Letter of credit but not the same. Let’s understand the difference between a bank guarantee and a letter of credit.

What is Bank Guarantee?

A bank guarantee refers to a contract. Wherein the bank gives the guarantee on behalf of the customer to the beneficiary, that the bank will be responsible for payment, In case the customer defaults in discharging obligations. BG settles the debts of the debtor. Thus, in case the borrower defaults on the loan, the lender promises to pay.

Understand Bank Guarantee in detail.

Types of Bank Guarantee:

1. Confirmed Payment Guarantee

This is an irrevocable obligation, with this a specific amount is paid by the bank to a beneficiary on behalf of the client by a certain date.

2. Shipping guarantees

A written guarantee is presented to the carrier in the event of goods arriving before the arrival of the shipping documents.

3. Loan guarantees

An institution that issues a loan guarantee pledges to take on the financial obligation if the borrower defaults.

How does Terkar Capital execute the bank guarantee instrument?

What is a Letter of Credit?

A letter of credit is a financial document for assured payments. i.e. An undertaking of the buyer’s bank to make payment to the seller, against the documents stated. The bank issues a letter of credit. In case, the buyer makes a default payment, the bank gives a guarantee to pay. So, LC discounting takes away the risk. The seller gets assurance for the funds.

Types of Letter of Credit

1. Irrevocable letter of credit

An irrevocable letter of credit is a guarantee from a bank, issued in the form of a letter. Thus, an agreement is created. Wherein the buyer’s bank agrees to pay the seller as soon as certain conditions of the transaction are met.

2. Confirmed letter of credit

This refers to an additional guarantee obtained by the borrower in addition to the first letter of credit from another bank. This is done in case there is an issue with the credibility of the first bank issuing LC.

3. Import letter of credit

Import letter of credit is issued by the importer’s bank on behalf of the importer with the exporter being the beneficiary. A guarantee is given by the importer bank that the payment will be made to the seller/exporter.

4. Export letter of credit

The letter of credit, when received by the exporter’s bank, becomes an export letter of credit. Before the exporter can receive payment, he has fulfilled certain terms and conditions and submitted the required documents as mentioned in the letter of credit.

5. Revolving letter of credit

A single revolving letter of credit can cover several transactions between the same buyer and seller.

How Terkar Capital executes a Letter of credit instrument?

Why choose Terkar Capital?

Terkar Capital provides top investment banking services in India. We consult the aspiring entrepreneurs and promote seamless funding solutions to them. We arrange and provide a wide range of products as per the clients’ needs and expectations. Our team of experts constantly guides the clients in each and every step of the funding process. Thus, preserving the confidentiality of the respective clients.

What is Bank Guarantee? Features, Process, and its Difference from Letter of Credit

Bank Guarantee Services

Every business needs a backbone of funds. It is for its effective operations and to maintain the competition in the market. Moreover, there are several debt instruments available for funding. While Bank Guarantees are used the most. In this article, we’ll shed light on what is a bank guarantee, its key features, its process, and how it differs from the Letter of Credit. 

What is Bank Guarantee?

The bank guarantee is a commitment provided by the buyer’s bank. It ensures that if the buyer fails to fulfill their obligations or make the payment, the bank will step in and make the payment, up to the specified amount mentioned in the guarantee. The lending institution offers Bank Guarantee (BG) as a financial instrument. However, the lender will ensure that the liabilities of a debtor will meet. In other words, the lender promises to cover a loss in case the borrower defaults on the loan. In the process of BG, four parties are involved in the transactions. Those are the applicant/ borrower, the issuing bank, the beneficiary and the beneficiary bank.

Features of Bank Guarantee

• BG builds confidence between the lender and the borrower. It adds assurance of transaction between an exporter and an importer. The primary reason for opting for BG is that many times the exporter and importer are unaware of transacting with each other. So, there can be a risk in the transaction. Hence, to overcome this risk involved, Bank Guarantee clears the hurdles.
• The BG obtain for a specified period. It is as per the need and requirements of the borrower. The applicant can hold the BG only up to a specified period, they can further renew it after maturity.
• The bank guarantee can or cannot hold assets against the instrument. The collateral depends upon the availability of the asset and the terms & conditions of the agreement between the lender and the borrower. It is also obtained without collateral.

Parties Involved in the Bank Guarantee Process 

• The applicant (importer): who requests BG from his banker as per the demand from the beneficiary
• The issuing bank: as per the request from the applicant, the bank issues the BG on the beneficiary’s bank.
• The beneficiary (exporter): is the party who demands BG.
• The beneficiary’s bank: is the one who receives the BG on behalf of the beneficiary.

How does a bank guarantee work?

“ABC Pvt Ltd” is an exporter company that deals with “XYZ Pvt Ltd”, and an importer. The exporter shipping goods requests the importer to get the Bank Guarantee from his banker. The banker on demand from the customer applies for BG and reduces the risk involved in the transactions. After receiving the BG, the applicant submits a copy to his other party which eases the procedure in the business operations. Here, “XYZ Pvt Ltd” is the applicant, the bank is an issuing party and “ABC Pvt Ltd” is a beneficiary.

In case of non-performance or default, the beneficiary can submit a claim to the bank.  The bank evaluates the claim and, if valid, settles the claim by making payment or fulfilling the obligation as specified in the bank guarantee.

Apply for Bank Guarantee

• The parties while transacting with each other, the exporter demands BG from the importer.
• The importer requests his bank for the BG and submits the necessary documents.
• After preparing BG, the bank communicates the same to the importer.
• The importer then requests the bank to send the BG to the exporter’s bank.
• The exporter’s bank on receiving BG communicates the same to the exporter.
• The exporter then ships the goods towards the importer after receiving the BG from the importer.

Here is the case study of the Bank Guarantee Process.

Difference between a Bank Guarantee (BG) and a Letter of Credit (LC)

In the case of BG, payment has been made only in case of a default of the buyer. And, in the case of LC, payment has been made on behalf of the customer after receiving the goods.

In the case of BG, payment is made at the non-fulfillment of the transaction between the parties. Whereas the LC payment is made only after the fulfillment of the condition specified.

To learn the difference in details Read here. 

Terkar Capital: Bank Guarantee Provider

At Terkar Capital, we specialize in assisting aspiring entrepreneurs and providing them with seamless funding solutions. While Bank Guarantee is among them. We understand the unique needs and expectations of our clients, and accordingly, we arrange and offer a wide range of financial products. Our team of experts is dedicated to guiding clients through every step of the funding process, ensuring their success while maintaining strict confidentiality.