Definition
A specific bank guarantee is an unconditional promise from the Export Credits Guarantee Department (ECGD) to a bank based in the United Kingdom. This guarantee allows the bank to provide financing to an exporter’s medium-term credit, which is extended to an overseas customer without the risk of recourse. The scheme is known as supplier credit, as opposed to buyer credit where the bank finances the foreign buyer directly to pay the exporter on cash terms.
Examples
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Medium-Term Export Financing: A UK exporter looking to sell machinery to an overseas buyer opts for an ECGD-backed specific bank guarantee. The bank then provides the necessary funds to the exporter to support the sale, secured by the ECGD’s guarantee. This way, the exporter receives payment upfront while the buyer can repay the bank over a medium-term period.
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Supplier Credit: A manufacturer in the UK wants to export goods to an international client and requests a bank guarantee from ECGD. The UK bank, assured by the unconditional guarantee, advances the necessary credit to the exporter. Throughout the repayment period, the bank relies on the ECGD guarantee rather than seeking recourse from the exporter.
Frequently Asked Questions (FAQs)
1. What is the difference between supplier credit and buyer credit?
Supplier credit involves the bank financing the exporter to offer credit terms to the buyer, while buyer credit involves the bank directly financing the foreign buyer to pay the exporter upfront.
2. How does the Export Credits Guarantee Department (ECGD) assist exporters?
ECGD provides guarantees to banks, enabling them to finance exporters. This reduces the risk for banks and facilitates exporters in offering competitive credit terms to their international buyers.
3. What types of products can be financed under a specific bank guarantee?
Typically, medium-term credit can apply to products such as machinery, equipment, and other goods that have substantial value and long-term utility.
4. Is specific bank guarantee limited to any particular industries?
No, any exporting industry can avail of this scheme as long as it meets the criteria set by the ECGD and the participating banks.
5. Can SMEs (Small and Medium-sized Enterprises) benefit from specific bank guarantees?
Yes, SMEs can benefit from this facility as it mitigates export credit risks, making it easier to negotiate medium-term payment terms.
6. Are there any limits on the amount that can be guaranteed?
The amount covered by the guarantee depends on the agreement between ECGD and the bank, as well as the exporter’s specific circumstances and creditworthiness.
7. How do banks benefit from ECGD guarantees?
Banks benefit from ECGD guarantees as they significantly reduce credit risk, making it feasible to offer financing in situations where they might otherwise abstain.
8. What happens if the overseas buyer defaults on repayment?
If the overseas buyer defaults, the ECGD fulfills its guarantee obligations to the bank, covering the loss. This arrangement shifts the risk away from the bank and the exporter.
9. How does an exporter apply for a specific bank guarantee?
Exporters typically apply through their financial institution, which processes the application with ECGD. The process involves assessing export contracts, credit terms, and the buyer’s creditworthiness.
10. Does the specific bank guarantee require collateral from the exporter?
Collateral requirements depend on the bank’s and ECGD’s specific conditions, although the guarantee itself is intended to reduce or offset the need for traditional collateral.
Related Terms
- Export Credits Guarantee Department (ECGD): A UK government department that provides insurance and guarantees to support UK exports.
- Supplier Credit: Financing extended by an exporter to an overseas buyer, often secured through a bank guarantee or insurance.
- Buyer Credit: A financing arrangement where the bank provides funds directly to the overseas buyer to pay the exporter.
- Medium-term Credit: Loans or credit terms ranging from one to five years, often used in export financing agreements.
References
Suggested Books
- “Export Credit Insurance and Guarantees: A Practitioner’s Guide” by Cheng Ji
- “International Trade and Export Management” by Francis Cherunilam
- “The Law of Letters of Credit and Bank Guarantees” by Bankim Chatterjee
Accounting: Specific Bank Guarantee Fundamentals Quiz
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