International Financing Guarantee
Introduction
International financing guarantee is a financial tool used to protect exporters from payment default because of a variety of risks such as political risks, currency risks, commercial risks and performance risks. The two main ways in which international financing guarantees are used are As an instrument of risk sharing with suppliers and other financiers, in which the guarantor shares the risk of non-payment with the exporter; and As a risk management tool, in which the guarantor assumes responsibility for a portion of the risk of non-payment, freeing the exporter from any potential liability to suppliers.
Benefits
International financing guarantees can provide a number of benefits for exporters. These benefits can include:
Reduced risk of payment default: By sharing the risk of non-payment with the guarantor, the exporter is able to reduce their own risk of non-payment in the event that the customer fails to pay.
Increased access to finance: International financing guarantees can serve as an additional source of credit for an exporter, especially in cases where the customer doesnt have sufficient creditworthiness for a traditional loan.
Enhanced terms of trade: By providing additional financing to the exporter, international financing guarantees can help the exporter negotiate better terms of trade with its suppliers which can help to increase their profits.
Improved supplier relations: As the guarantor is responsible for a portion of the risk of non-payment, suppliers may be more willing to provide goods and services to the exporter, helping to foster strong relationships.
Types
There are several different types of international financing guarantees that are commonly used. They include:
Demand guarantees: A demand guarantee is a guarantee issued by a guarantor in favor of the exporters customer that guarantees payment of a certain amount of money if the customer fails to fulfill its obligations under the contract.
Performance guarantees: A performance guarantee is a guarantee issued by a guarantor in favor of the exporter that guarantees that the buyer will fulfill its obligations under the contract.
Advance payment guarantees: An advance payment guarantee is a guarantee issued by a guarantor in favor of the exporter that guarantees payment of a certain amount of money if the customer fails to pay for the goods or services in advance.
Conclusion
International financing guarantees provide a number of benefits for exporters, including reduced risk of payment default, increased access to finance, enhanced terms of trade, and improved supplier relations. There are a number of different types of international financing guarantees that are commonly used, such as demand guarantees, performance guarantees, and advance payment guarantees.
Exporters should consider taking advantage of international financing guarantees in order to maximize the potential benefits that they can provide.
