In an international transaction, a SELLER usually requires to be secured for payment for a shipment. He asks the BUYER to provide such security for payment on agreed terms. What does this mean: The seller does not trust that he will get paid as agreed. A SELLER obviously does not have an appetite to carry any sort of risk of not getting paid.

If the BUYER cannot create sufficient level of comfort through assets, his credibility, own business or trade history, personality or professionalism, or come up with collateral or a tangible security for the SELLER assuring payment after shipment, then the client is dependent upon third parties. In that case a third party has to secure payment for the shipment. The BUYER seeks help from others to provide such level of comfort for the SELLER.

With these thoughts we have established the problem: There clearly is a risk that the BUYER cannot pay as agreed. The risk is shifted to another party. A third party is supposed to take a risk the SELLER won’t take and the BUYER can’t cover.

What happens next is that a third party provides such resources for the BUYER and avails the required SECURITY to the SELLER. A third party has to carry a risk that the BUYER represents, but cannot cover himself.

What might be the reason why a BUYER is not be able to satisfy the safety needs of a SELLER?

Buyer has no collateral, or cash to secure the purchase and the shipment
- If he would have, he could pre-pay for the purchase
The BUYER is missing convincing credibility, personality or professionalism
- If he would be convincing, the SELLER would deliver
The BUYER cannot evidence a successful own business or trade history.
- If there would be a successful trade history, banks probably would fund him.

Why would a BUYER not ask his own bank for the service?

- because the bank does not engage in LC business
- because they are not an acceptable institution

Banks usually co-operate with partner banks that can provide the service in a satisfactory way, or a service they themselves can’t provide.

Why would a valid BUYER not get the service from the people he works with on a day to day basis – the bank?

Banks obviously earn money when they provide this service. Why would a BUYER’s own bank not be willing to issue the financial security instrument that might be needed? What might be a bank’s reason to deny the service and not to earn money on a transaction? The answer is obvious: They do not find a BUYER credit worthy for the service. The bank knows exactly what a BUYER’s financial dealings are. If they refuse to provide this service to a BUYER, they demonstrate that a BUYER is not credit worthy for the service, at least as to banking standards. They are aware of the risk the BUYER and his transaction represents and do not want to carry that risk for a simple fee payment.

So why is a BUYER looking for alternatives?

(A) The SELLER does not accept to take the financial risk in a transaction
(B) Buyer has no collateral, or cash to secure the purchase and the shipment
(C) A BUYER is missing convincing credibility, personality or professionalism
(D) The BUYER cannot evidence a successful own business or trade history
(E) A bank is not satisfied with a BUYER’s creditworthiness

Is your reason A, B, C, D or E, or all of the above, or anything else? Whatever it is, you can now see that this BUYER has a serious problem – which, by searching for a solution, he tries to impose on a third party. There are genuine risks which the SELLER will not take, the BUYER cannot compensate and the BUYER’s bank will not accept even if you pay a fee.

Once your realise the situation and comprehend the risks involved, then we have a basis to talk, and we are capable to tailor a solution. In that case, START TO FILL IN THIS FORM, complete it and provide all the required information which is detailed in this document. After you submitted your most complete request, let us talk!


2020 Credit Enhancement Instruments Application

Categories: Trade Finance


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