Non Resident banks offering financial instruments
Financial instruments are a great tool for companies that are involved in international trades, as it allows companies to reduce risk and increase access to credit.
Trading tools such as Letter of Credit and Bank Guarantee, are exclusively used by businesses and not individuals.
Companies located in countries where local banks do not offer trading instruments for international transactions, will find it extremely beneficial to open an offshore bank account for this for reason alone.
Offshore banks that offers financial instruments for international transactions
Only offshore bank that offer transactional accounts, are likely to offer any form of financial instruments.
The most commonly used and requested financial instruments by international non resident companies are:
- Bank Guarantee
- Escrow – Payment for service or products are deposited into an escrow bank account, and are only released once all agreed conditions of the transaction are fully satisfied, ensuring safety and security for buyer and seller.
- Letter of Credit (LC)
- Back-To-Back Letter of Credit
- Revolving Letter of Credit
Which financial instrument is best for international transactions?
Depending on the purpose, as well as the relationship between the buyer and the seller, various combinations of Letter of Credit, Escrow and Bank Guarantee may be used.
| Letter of Credit (LC) | Back-to-Back LC | Revolving Letter of Credit (Revolving LC) | Standby Letter of Credit (SBLC) | Commercial Letter of Credit | Bank Guarantee (BG) | |
|---|---|---|---|---|---|---|
| Purpose | Secures payment for the supplier of goods/services | Allows trader (intermediary) to buy from supplier using buyer’s LC | Facilitate ongoing shipments under one renewable Letter of Credit | Serve as a secondary guarantee of payment if buyer fails to pay | Standard LC used for trade of products or delivery of service | Secure the seller of performance/payment obligations of the buyer |
| Triggered When | Documents provided | Supplier provides documents for second Letter of Credit | Documents provided for each shipment | If buyer defaults or fails to perform | Documents provided as per LC terms | Applicant defaults |
| Parties Involved | -Buyer -Seller -Issuing Bank | -Buyer -Trader -Supplier -Two Banks | -Buyer -Seller -Issuing Bank | -Applicant -Beneficiary -Issuing Bank | -Buyer -Seller -Issuing Bank | -Applicant -Beneficiary Bank |
| Protection | Protects seller from non-payment by buyer | Protects intermediary/trader financing risk | Protects seller for recurring orders | Protects beneficiary against buyer’s default | Protects seller against buyer’s non-payment | Protects beneficiary against buyer’s non-performance |
| Usage | International trade | Trading/intermediary business | Long-term supply contracts or regular shipments | Project finance, service contracts, performance assurance | Trade in goods and services | Construction, real estate, large-scale contracts |
| Features | One-time transaction | Second LC is issued against the first LC | LC amount automatically “reactivates” after it has been utilized by value or time | Functions like a bank guarantee — pays ONLY if buyer defaults | Most common LC used for import/export payment | Activated only if buyer fails to pay |
| Bank’s Role | Primary payer upon document compliance | Issues second LC based on first LC as collateral | Automatically reinstates after each usage | Secondary payer (insurance if buyer default) | Primary payer upon compliance | Secondary payer (only on default by original buyer) |
Offshore banks that can provide financial instruments For international tradew
Various factors need to be taken into consideration, before determining which offshore bank is ideal, for opening a bank account that allows international businesses access to the bank’s financial instruments for trade.
Points of consideration by both businesses and banks include:
- Company business activity.
- Country of company incorporation.
- Countries where the supplier and buyers are located.
- Nationality of company owner.
It is potentially possible to open a bank account internationally that offers financial instruments such as Letter of Credit, Bank Guarantee and Escrow accounts, without the need to visit the country, in:
- Bahamas
- Comoros
- Curacao
- Cyprus
- Gibraltar
- Guyana
- Laos
- Mauritius
- Seychelles
- St. Kitts and Nevis
Potentially, there are more other offshore jurisdictions that can offer some form of financial instrument for trading.
How much does it cost to obtain a Letter of Credit (LC)
Depending on the amount of credit and type of LC to be provided, as well as the time it is valid for, the fee charged by the offshore bank can either be a fixed amount or a percentage.
Who is eligible to obtain a Letter of Credit?
Letters of credit are generally obtainable by most companies who requested as long as their business profile, matches the risk appetite of the bank.
Offshore banks consider the following points before issuing an LC:
- The amount of credit requested.
- The condition in which the payment is to be made, such as when the products are delivered or received by their shipping company.
- The country where the company is incorporated.
- The fee to be paid on the letter of credit.
- The location of the customer and their supplier/client.
- The nationality of the owner.
- The purpose of the Letter of Credit.
- The time before payment is to be made after shipment has been delivered or service rendered.
- The type of good to be traded.
Which financial instrument is the best in international trade?
Depending on the transaction’s circumstances like the agreement between buyer and seller, different financial instruments are used in different scenarios.
Two parties interacting may use one particular financial instrument for one transaction, and a completely different tool for another.
It is best to assess the company situation and agree with the other party in the transaction to avoid potential issues.
How BUH consulting can assist
Our banking team will work with you to understand your requirements, eligibility criteria and apply at eligible banks that are suitable for your business, offering various financial instruments, and assign relationship managers from different banks that can offer the proper trading instrument that your company is looking for.
Contact information
For a tailored solution, contact us to discuss about your requirements.
Email: – sam@buh-consulting.com
Phone: +971585086656
Whatsapp: +971585086656
Telegram: BUHConsultingAE