Monetising Demand Bank Guarantees
As advised earlier a Demand Bank Guarantee is utilised for monetisation or credit lining purposes only. The lending bank is 100% protected by this instrument due to the unique and precise verbiage contained within the format.
The demand bank guarantee is now owned by the beneficiary. Now that the collateral is sitting on their account they can take their pre-prepared business plan to their bank. Offering the demand bank guarantee as security the beneficiary can now request a loan or line of credit. When credit lining a demand bank guarantee loans and lines of credit are often referred to as Credit Guarantee Facilities.
Monetising Standby Letters of Credit
When a standby letter of credit is monetised it takes on the same persona a demand bank guarantee. Whilst they are two different instruments, when monetised a standby letter of credit will be governed by ICC Uniform Rules for Demand Guarantees, (URDG 758). The verbiage contained within the format will be identical to that of a demand bank guarantee.
Bank Instruments the Difference Explained
A bank guarantee (BG), differs from a standby letter of credit (SBLC) and a documentary letter (DLC). A bank guarantee guarantees payment to the beneficiary in the event of a financial loss. A bank guaranty is a security for payment.
The standby letter of credit and the documentary letter of credit both underpin trade finance transactions. These bank instruments are therefore a means of payment.
However, when a standby letter of credit is utilised for monetisation purposes, it too becomes a security for payment.