They are willing to place the order immediately if you can offer them an open account with a 60-day payment term. Your company has a sales enquiry for a large order worth EUR10,000,000 from a new buyer in Norway.

How can you mitigate non-payment risks with a BG when you’re selling to a new buyer on an open account?

To understand the mechanism of a BG, we will be using 2 scenario-based illustrations. Let’s take an in-depth look at how using a BG can protect you from non-payment risks when selling under an open account, and propel your business forward with new opportunities. Banks therefore issue independent demand guarantees as opposed to suretyships. Once the BG is issued, it is irrevocable except with the consent of all parties. This means the bank’s obligation under the BG shall be independent of your underlying contractual terms. Keep in mind that the bank is not a party to your underlying contract and not privy to your contractual terms. In most cases, the financial institution is typically a bank. This is provided that the terms and conditions of the BG are complied with. The above, in essence, describes the two most common reasons as to why a buyer or seller would want a BG in the course of their business dealings.Ī BG in its most common form is a payment undertaking by a financial institution to pay the beneficiary up to the specified maximum sum upon the receipt of a documentary demand. Such undertakings to pay, issued by a financial institution, are called a Banker’s Guarantee (BG). In lieu of this cash deposit, the buyer can also accept a guarantee from a reputable and trusted financial institution. Under the contract, you may be required to give a cash deposit as security to assure the buyer that you will indeed perform the supply contract. But what if there was a reputable and financially strong third-party who was willing to guarantee payment for your potential buyer? And if the buyer did not meet their payment obligations to you, you can simply demand that the third-party pay you instead.Īnother instance would be if you have secured a contract to supply goods and services to another company. But what happens if you don’t trust that a company is able to pay you? Do you forgo the business altogether even if it might be detrimental to both you and them? On the other hand, what if you sell goods to a buyer that turns out to be incapable of paying you? How do you handle the financial loss? For instance, if you sell goods to another company (especially on credit terms), it means you trust the company’s capability and willingness to pay you when the invoice comes due.

Ocbc fixed deposit rate 2021 ingapore