Project Funding & Banking Instruments Defined: BG, IPIP, MTN, SBLC…
Located below is a list of some Project Funding & Banking Instruments used in Business Finance. These include Genuine Bank Guarantees, Standby Letter of Credit, Pre Advice / RWA Messages, Documentary Letters of Credit, Bank Draft, Proof of Funds, Performance Bond, Medium Term Notes, and various SWIFT messaging services on lease and sale. SWIFT messaging services include SWIFT MT 760, MT 799, MT199, MT999 and other messages.
What Is a Bank Draft?
The term bank draft refers to a negotiable instrument that can be used as payment just like a check. Unlike a check, though, a bank draft is guaranteed by the issuing bank. The total amount of the draft is drawn from the requesting payer’s account—their bank account balance decreases by the money withdrawn from the account—and is usually held in a general ledger account until the draft is cashed by the payee. Bank drafts provide the payee with a secure form of payment.
What Is a Bank Guarantee?
A bank guarantee is a type of financial backstop offered by a lending institution. The bank guarantee means that the lender will ensure that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it. A bank guarantee enables the customer, or debtor, to acquire goods, buy equipment or draw down a loan.
What is a Documentary Letter of Credit?
Documentary letter of credit means a letter of credit that is payable when presented with a certificate of title or invoice. Hence, a documentary letter of credit requires that a draft on the letter of credit be accompanied by some document, such as a document of title or a certificate of default. This is in contrast to a clean letter of credit which is payable merely upon the presentation of a draft with no accompanying documents. A standby letter of credit is one whereby the issuer agrees to pay the beneficiary upon presentment of documentation indicating that the account party has defaulted on a payment obligation. Therefore, a standby letter of credit will often be a documentary letter of credit since the issuer will require some kind of accompanying documentation to indicate or establish that there has been a default, making it liable to pay.
What is IPIP?
IP to IP bank server transfer is network to network connection. Usually uses fiber optic to fiber optic connection or pure IP connection.
IPIP is a currency transfer method done by servers in a way that the money from the common account of the Bank is entered into the receiver’s common account, and it is uploaded or downloaded by the sender or receiver’s officer. In the IP/IP method, the entry of the currency into the receiver’s server is uploaded.
What Is a Letter of Credit?
A letter of credit, or “credit letter” is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make a payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. It may be offered as a facility.
What Is a MTN?
A medium-term note (MTN) is a note that usually matures in five to 10 years. A corporate MTN can be continuously offered by a company to investors through a dealer with investors being able to choose from differing maturities, ranging from nine months to 30 years, though most MTNs range in maturity from one to 10 years.
What is Pre-advice?
In letters of credit, at the request of an applicant, the issuing bank may give a pre-advice of issuance and/or amendment of the letter of credit. A pre-advice is usually marked with a reference such as “full details to follow”. Unless otherwise stated, the pre-advice irrevocably commits the issuing bank to issue/amend the credit in a manner consistent with the said pre-advice. See amendment; advising bank; issuing bank; letter of credit.
What Are POFs?
Proof of funds (POF) refers to a document or documents that demonstrate a person or entity has the ability and funds available for a specific transaction. Proof of funds usually comes in the form of a bank, security, or custody statement. The purpose of the proof of funds document is to ensure that the funds needed to execute the transaction fully are accessible and legitimate.
What is RWA?
A Ready Willing and Able Letter (RWA) is a document issued by a bank or financial institution for their clients.
It demonstrates the intent and capability of the clients to enter into a financial business transaction both legally and financially.
After being issued, the Ready Willing and Able Letter (RWA) is sent to the beneficiary via MT799 SWIFT message.
What is a SBLC?
A SBLC is a standby letter of credit is a legal document that guarantees a bank’s commitment of payment to a seller in the event that the buyer–or the bank’s client–defaults on the agreement. A standby letter of credit helps facilitate international trade between companies that don’t know each other and have different laws and regulations. Although the buyer is certain to receive the goods and the seller certain to receive payment, a SBLC doesn’t guarantee the buyer will be happy with the goods. A standby letter of credit can also be abbreviated SLOC.
What is SWIFT?
Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a member-owned cooperative that provides safe and secure financial transactions for its members.
This payment network allows individuals and businesses to take electronic or card payments even if the customer or vendor uses a different bank than the payee.
SWIFT works by assigning each member institution a unique ID code that identifies not only the bank name but country, city, and branch.
What is MT199?
MT799 is a message that is sent between banks; with the aim of showing funds or proof of deposits. It is important to note that it is not used as a method of transferring funds or an undertaking to do the same. It is a type of inter-bank message that is used on the SWIFT system so that financial institutions can correspond freely.
What is MT 760?
T 760 is a swift message type that is used by issuing banks when issuing a guarantee or a standby letter of credit.
Issuing banks send terms and conditions of a guarantee or a standby letter of credit with a MT 760 Guarantee / Standby Letter of Credit swift message type.
What is MT 799?
MT799 is an essential part of international trade; a ‘free format message’ sent between banks which confirms funds or proof of deposits on a potential trade. MT799 allows banks to communicate between each other freely through the SWIFT system, rather than being a mechanism for transferring funds or paying.
What is MT999?
An MT999 is the same as MT799, just without this test code. therefore it’s considered unauthenticated, and MT999 messages have no value whatsoever, unless confirmed via a separate test key.
What Is a Performance Bond?
A performance bond is issued to one party of a contract as a guarantee against the failure of the other party to meet obligations specified in the contract. It is also referred to as a contract bond. A performance bond is usually provided by a bank or an insurance company to make sure a contractor completes designated projects.
