The bank at a glance
SWIFT is the Society for Worldwide Interbank Financial Telecommunications. It was founded in Brussels in 1973 to meet the strong demand to send money quickly and efficiently to other countries. It operates a closed network that operates between banks and financial institutions.
Today, SWIFT is present in 208 countries and more than 8,000 banks use this messaging network.
SWIFT codes differentiate different types of messages. In order to identify the different types of SWIFT messages, numbers are assigned to each of them. The prefix “MT” means “Message Type”, and the three-digit number that follows it represents a specific type of message.
To transfer messages, SWIFT has developed nine different types of messages.
The MT103 is the most commonly used form of SWIFT communication. For most bank customers, MT103s are called wire transfers, wire transfers or SWIFT transfers. A SWIFT MT103 is used by the bank when its customers wish to make a payment for customers of another bank abroad.
The current payment method after delivery used by many suppliers is the MT103 (bank transfer), or in case of default, the SBLC to pay the goods.
The MT799 is a type of free format SWIFT message in which a banking institution confirms that funds are in place to cover a potential transaction, but is not a promise of payment or some form of bank guarantee in its standard format. The function of the MT799 is simply to assure the seller that the buyer has the funds necessary to complete the transaction.
If the MT799 is marked as RWA message, the issuing bank could not block the funds of the buyer.
An account with the SWIFT MT799 feature enables SWIFT electronic verification from bank to bank for evidence of the existence of funds in accordance with the SWIFT Category 7 message types “Treasury Markets & Syndication”.
The MT799 is usually issued before a contract is signed and before a letter of credit or bank guarantee is issued. After the MT799 has been received by the seller’s bank, it is normally his responsibility to confirm to the buyer’s bank and with his full responsibility that the seller owns the product and is able to delivery as written in the reference SPA. From this point, trade can begin.
After Swift has been confirmed by both banks and they are in direct communication (secure banking network), the buyer’s bank issues the MT760 SBLC / BG valid for one year and one day to guarantee the seller that he will be paid in case of default.
SWIFT MT760 SBLC / BG
Usually this is a message sent at the request of the account holder from one bank to another. The account holder wants to show the other bank that there are funds available to cover a particular transaction. In order to convey this message, the account holder agrees that his bank will hold the same amount of funds for the security of the transaction. This security feature makes the MT760 a financial instrument with cash back guarantee.
Some US banks do not readily issue MT760 messages. Before initiating such a transaction, you must verify that your bank will handle these transactions. Fees are associated with these transactions. They can reach 0.05% of the amount of the transaction. This transaction is common for amounts of $ 1 million or more.
Another common use of the MT760 is to save large projects of different kinds. To achieve this, you must have a good project to start. Then you must have a bank ready to issue the MT760. You will have to cover all the associated costs. You must also know how you will manage the closing of the transaction at the end of the project.
Letter of credit
The letter of credit is a financial document issued by an issuing bank at the request of a buyer (the applicant) in favor of a seller (the beneficiary). It is an undertaking by the importer’s bank to guarantee to the exporter the payment of the goods against the delivery of a transport ticket. It is better known as Documentary Credit (L/C) or Crédoc. Documentary credit is the reverse operation of documentary remittance.
The letter of credit can be used in two different ways:
– directly: In this case, only one bank intervenes. The buyer’s bank carries out the issuance and implementation of the letter of credit. She notifies the buyer directly.
– indirectly: The buyer requests the intervention of his bank in the implementation of the documentary credit. In this case, two banks intervene, the bank (“notifier”) of the seller and the bank (issuer) of the buyer.
Different types of letter of credit
There are several kinds of documentary credit:
– the irrevocable letter of credit can not be modified or canceled without the agreement of all parties concerned. It can be notified or confirmed by the bank.
– the revocable letter of credit may be amended or canceled by the bank. Payment can be guaranteed under certain conditions.
– the letter of credit is transferable, if the beneficiary can make the credit available to another beneficiary or beneficiaries
Difference between documentary credit and standby letter of credit
The standby letter of credit is not a payment instrument, unlike the documentary credit. It is a bank guarantee to guarantee the good execution of a contract. It is carried out only in case of failure of the client in the performance of his contractual obligations. The stand-by letter of credit is suitable for bid, performance and advance payment guarantees.
What is it for?
The letter of credit is used to reduce any risk associated with an international business transaction, when the buyer and the seller may not know each other.
If you are an importer, the letter of credit guarantees that your company will not pay for the goods until the supplier proves that the goods have been sent. This allows you to keep your cash, because you do not have to make advance payments or down payment to the exporter. In addition, the letter of credit instantly makes you a credible partner to the exporter because it demonstrates your credit worthiness.
If you are an exporter, the letter of credit guarantees that in the event of non-payment of the goods you have sent, the financial institution will refund the outstanding amount. The letter of credit also protects you against legal risks, since your payment is insured as long as the delivery conditions have been met.
For the exporter, a letter of credit can also be used as collateral for loans for working capital purposes, helping you to fulfill your order.
Definition of stand-by letter of credit
Also known as SBLC (Stand-By Letter of Credit), is a bank guarantee with which the importer guarantees to his supplier that his bank will replace him if he is in default, provided that the exporter presents the documents claimed as proof of the existence of the claim.
Unlike the documentary credit that has to be realized, the SBLC’s vocation is not to be put in play. Therefore it is not exactly a payment instrument, it is a financial contract independent of the commercial contract.
It is the buyer who originates the SBLC and who makes the request to his bank (issuing bank), who will inform the seller through a notifying bank (or confirming).
In the event of non-payment by the buyer, the seller turns against the notifying bank which is reimbursed by the issuing bank. Charge to the latter to be reimbursed by the buyer.
Note: This information is free of charge and cannot be used against SAAME, TT.