Loan Guarantee

In simple terms, a loan guarantee is a financial agreement where the lender seeks additional security before financing the borrower’s loan. The extra protection helps expedite the loan acquisition process, hence, beneficial to both the involved parties. Credico Capital provides a range of guarantees which are further classified as a documentary USANCE letter of credit, documentary letter of credit at sight, standby letter of credit, and more. All the guarantees offered are legally binding documents that hold the guarantor liable for the repayment of the beneficiary’s loans or other obligations in the event of the beneficiary’s inability to pay them. While the loan agreement is between the borrower and lender, the parties involved in the guarantee are the lender and guarantor. To know about loan guarantees and how it can work for you, send us an inquiry today!

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Loan Guarantee

Understanding Loan Guarantee

The idea behind a guarantee remains the same, regardless of the way they are used. Finance issuers offer this facility to borrowers and lenders to secure financial transactions in different situations. As far as trade finance is concerned, guarantees usually serve two purposes:

First and foremost, a loan guarantee offers assurance to importers, specifically in cases where partial deposits or payments have to be made to suppliers operating internationally. In this case, the financial agreement is secured through an advance payment guarantee, offered by us at Credico Capital, to the importer (who is at risk). Secondly, a loan guarantee protects importers from contract breaches by the supplier. With trade finance, there is always a risk of unforeseeable delays, errors, or unsatisfactory quality. However, with Credico Capital, the importer can secure himself with compensation payments or penalties to be paid in terms of the contract are not duly met. Below we discuss a few pointers to give you a better understanding of the process:

  • Company “A” is a local trader who imports kitchen appliances from the US to UAE.
  • A client reaches out to “C” demanding a supply of 1 million worth of kitchen appliances.
  • “A’s” current supplier’s “C” is unable to cater to such a huge order. Therefore, “A” finds a new supplier –Company “B”– and negotiates a contract for 1 million worth of appliances to be delivered to the UAE for 800K.
  • As “B” has never worked with “A” before; they demand a 20% down payment of the amount as security.
  • Before making this payment, “A” agrees to an advanced payment guarantee with Credico Capital, where if “B” fails to fulfill the contract, Credico Capital guarantees that “A” will have their down payment returned.
  • “B” makes the down payment, and the appliances are shipped to UAE.
  • Payments are made, the terms of the contract are met, and the guarantee expires.

Advantages of Loan Guarantee

Through loan guarantee, one can be assured of prompt processing of guarantee issuance and transactions. We here at Credico Capital offer a variety of loan guarantees to suit varied requirements, with the renewals being quick and hassle-free.