Remittance
Remittance refers to a process of sending or transferring money by one party to another party through various electronics modes of payment within or outside of the country. In the process of remittance transactions, there are mainly four parties involved which are given below;
Parties involved in remittance transactions
Sender: This party is usually an immigrant worker who starts this transaction by determined to send hard earned money at their home country or their family and friends.
Sending Agent: This party is a financial institution established in a foreign country who receives money from sender party and send money to his/her home country after deducting certain percentages of commission rate.
Receiving Agent: They are the financial institution established in a home country who receives money from a sending agent through electronic modes.
Receiver: They are the final party of this transaction to whom money is sent from the foreign country or within country. They visit to receiving agent with related documents and information to withdraw money.
Bank Guarantee
A Bank guarantee is a non-funded facility offered by a bank to provide the financial guarantee to the beneficiary on the request & behalf of the applicant.
In short, it is a contract between three different parties before conducting financial transactions that ensures the liabilities of the applicant will be met in case the applicant failed to settle the debt.
Bank guarantee is treated as a contingent liability therefore; it is not recorded on the balance sheet and is the part of the off-balance sheet items.
It acts as a moderator for the entire deal so that it flows smoothly.
It can reduce likely financial losses that may arise in case buyers failed to pay its liabilities.
It creates business opportunities as it earns exporters’ trust within and outside the country.
It does not require too much paper work for the implementation of such instruments.
It increases the credibility of brand as it act as an evidence of financial strength of the importer
Bank guarantee Vs Letter of Credit
Reasons to use letter of credit in the international trade
It helps in expanding the international business quickly into new geographies.
It opens door to international trade by providing a secure mechanism for the payment upon the fulfillment of the contractual obligations.
It provides safety to importers and exporters while conducting business transactions through such non-funded negotiable instrument.
Bank expertise is made available to help complete trade transactions successfully.
It allows exporters to significantly reduce the risk of non payment for the delivered goods and reduces risk of not receiving or receiving damaged goods opposite of order.
It is issued after the compliance with the prevailing laws of different countries, hence it keep safe from legal obstacles.
To reduce the complexities of process, and several related risks, it determines the functions, duties, and authority of involved parties and implements such concept universally.
An official admistration of International chamber of Commerce i.e. Uniform Customs and Practice for Documentary Credit (UPCD 600 version) makes it reliable.
