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What Does Letter Of Credit Mean?
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 payment on the purchase, the bank will be required to cover
the full or remaining amount of the purchase.
Investopedia explains Letter Of Credit

Letters of credit are often used in international transactions to ensure that
payment will be received. Due to the nature of international
dealings including factors such as distance, differing laws in each country
and difficulty in knowing each party personally, the use of letters of credit
has become a very important aspect of international trade. The bank also
acts on behalf of the buyer (holder of letter of credit) by ensuring that the
supplier will not be paid until the bank receives a confirmation that the goods
have been shipped
What is Packing credit?
Packing credit is a loan/ cash credit facility sanctioned to an exporter in the

Pre-Shipment stage . This loan facilitates the exporter to purchase raw
materials at competitive rates and manufacture or produce goods according
to the requirement of the buyer and organize to have it packed for onward
export.. The lending institutions seek a Letter of Credit opened in favour of
the exporter from the overseas buyer along with the irrevocable (cannot be
canceled once drawn) Purchase Order favouring the exporter.
Packing Credit facility will cover all the working capital needs of the exporter
including raw materials, wages, packing costs and all pre-shipment costs..
Packing credit is available for generally a period of 90 days and the exporter
has to pay lower rate of interest compared to traditional Overdraft or Cash
Credit facility.
Exporters use this facility so they can bid the most competitive price for
export thus gaining more business opportunities for export.
What is over draft?
An Overdraft facility allows the customer to withdraw the money even if the
amount to be withdrawn is in excess of the credit balance available. This
facilitates the customer to honor the payment to be made to the party
though the account may not have sufficient balance. The maximum
overdraft limit is sanctioned by the bank and is agreed upon by the
customer. The excess amount withdrawn is charged interest upon and must
be settled by the customer on demand from the bank.
Based on the security provided to the bank, a certain limit is fixed to the
extent of which the customer is allowed drawing. The securities which are
preferred by the banks or lending institutes
Pledge of securities : A customer offers a kind of collateral security in terms

of shares or mutual fund units or bonds to the bank or lending institute to
obtain overdraft facility. The bank can sell or liquidate these securities to
cover up the overdrawn amount and the interest thereon if a customer fails
to settle the obligation.
Against Policy: Insurance Policy is another type of security against which

Overdraft facility can be obtained. The bank or lending institute determines
the actual amount of premium paid and the amount on maturity to set the
Overdraft limit. In case of the death of customer the overdrawn amount is
recovered from the claim settlement from the Insurance Company.
Against Property: Property can also be mortgaged with the bank or lending
institute to get overdraft facility. Properties generally have appreciating
value in the market and hence are preferred as securities. On defaulting on
the settlement of overdrawn amount the bank or lending institute may sell
the property to recover the overdrawn amount with interest thereon and
balance, if any, is returned to the customer.
Against Receivables: Any kind of authenticated receivables like Bills

Receivable, Rent Receivables can be the taken as security for the overdrafts.
The proceeds of all receivables are routed through the overdraft account and
immediately settled against the overdrawn amount. However drawings can
be allowed against fresh receivables. Thus the amount of receivables
remains as a continuing security for all drawings. The bank or lending
institute ensures that no other loan or obligation is availed by the customer
using the same receivables. The amount of receivables and the time
required to honor or materialize the receivables are the key factors to
determine the limit of overdraft.
Against Stock: Traders and manufacturers prefer availing the CASH CREDIT
facility against the stock. The value of the stock of goods is assessed by the
bank or lending institute and against; the cash credit limit is sanctioned. The
amount is gradually settled against the amount of sale of the stock. The
value of stock is assessed by physically verification and from the purchase
invoices and is ensured that it is fully paid for. The bank will fix a margin
amount that has to be brought by the borrower.
Against Car: Any kind of authenticated receivables like Bills Receivable, Rent
Receivables can be the taken as security for the overdrafts. The proceeds of
all receivables are routed through the overdraft account and immediately
settled against the overdrawn amount. However drawings can be allowed
against fresh receivables. Thus the amount of receivables remains as a
continuing security for all drawings. The bank or lending institute ensures
that no other loan or obligation is availed by the customer using the same
receivables. The amount of receivables and the time required to honor or
materialize the receivables are the key factors to determine the limit of
overdraft.
Against Gold: Gold can be immediately converted into cash and has always
increasing value. This makes the gold one of the most preferred security to
obtain the overdraft facility. Banks or lending institutes assess the cost of
gold offered by the customer as security and determine the limit of
overdraft. Once the gold is assessed by the bank or lending institute the
overdraft the sanctioning process can be completed quickly.
Term Loan
Term Loan is a loan borrowed for fixed amount over the fixed period of
repayment and floating rate of interest. The borrower is offered a predefined
schedule of repayment by the lending institution comprising of principal
amount and interest thereon. Term Loan is secured by a collateral security.
Term Loan facilitates the borrower to raise a stipulated amount one time and
plan the business expenditure or investment or purchases on his or her own.
Term Loan is normally preferred by small and medium scale businesses to

meet the needs of working capital or to buy assets or infrastructure which is
required to run the business on day to day basis. It may include purchase of
machinery or buying an office or workshop premises
The maturity period or term is between 1 â€“ 10 years.
The term Loan can be availed to Purchase of Fixed Assets
The term loan can be used to purchase fixed assets like premises, plant &
machinery etc. The usage or performance of assets increases the business
performance and hence the profit and makes the repayment of the loan
easier. Even the term loan is settled the assets procured continue the
productivity as asset life span is certainly longer than the term loan span. If a
premises is purchased then the value of premises is always appreciated and
in that case the business leverages higher value of premises which further
can be used to raise funds for business expansion or diversification.
Switching of Higher Interest Loans
Many a timeâ€™s business owners opt to raise business loans at higher rate
of interest. Such loans are processes and sanctioned faster but result in
heavy burden interest. This interest payment becomes a fixed monthly
expenses and starts leaking the profit. To arrest the growing rate of interest
and penalties the higher interest loan can be switched to lower rate of
interest loans or term loans. This way a borrower reduces the growing
burden of interest on business loan and can save a considerable amount of
money. It also benefits in maintaining the credit rating as the borrower
closes one loan liability and opens another in form of term loan with lower
rate of interest and easier repayment conditions.
Mortgage Term Loan
A Term Loan can be availed by mortgaging a kind of security like home,

office premises etc. This type of loan is borrowed for longer period of time
that is 10, 15 or 20 years. The repayment of the principal amount and
interest may be fixed in nature or it may vary over the course of repayment.
The borrower may avail the revised rate of interest later and may be
benefited by saving in interest.
Bank Guarantee
Bank Guarantee is comfort to the buyer or seller for recovering the losses or
damages, if the CLIENT, on whose behalf the guarantee is issued, fails to
complete or conform to the terms of agreement. By issuing this guarantee,
the issuing bank is assuring payment of the certain amount of money (as
specified in the bank guarantee) to the beneficiary in case of non-
performance of a certain contract according to the terms and conditions
contained in the same.
A bank guarantee might be revoked by the seller (beneficiary) when the

buyer fails to pay the seller for the goods supplied. In such a situation, the
bank pays the beneficiary to the extent of the amount of Bank Guarantee.
Similarly, on the other side if the Seller fails to deliver the goods or complete
the terms of agreement, the bank guarantee may be cancelled by the
buyer.
This instrument or method is often used in Selling, Buying or Service

Providing contracts across countries and / or where both the parties have no
established business relationships
Performance Guarantee: The seller issues a Performance Guarantee to
ensure or give concrete commitment to the buyer through its bank. This
method ensures the buyer the timely execution of an agreement to have the
goods exported or delivered or services performed. In case the seller
defaults on execution of the terms agreed upon the Performance Bank
Guarantee ensures the buyer the payment of the guarantee amount by the
issuing bank. Generally the performance guarantee is 10 percent of the total
assignment or project value.
Financial Guarantee : Financial Guarantee is a bond which is not cancelable

and ensures the payment of the interest and repayment of the principal
amount as per the schedule agreed upon by both the borrower and the
lender. A guarantor to this debt security is liable to pay off the liability in
case the first party or the issuer of the Financial Guarantee fails to make the
payment.

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What Does Letter Of Credit Mean?

A letter from a bank guaranteeing that a buyer's payment to a seller will be

Investopedia explains Letter Of Credit

What is Packing credit?

Packing credit is a loan/ cash credit facility sanctioned to an exporter in the

What is over draft?

Pledge of securities : A customer offers a kind of collateral security in terms

Against Policy: Insurance Policy is another type of security against which

Against Receivables: Any kind of authenticated receivables like Bills

Term Loan is normally preferred by small and medium scale businesses to

The maturity period or term is between 1 â€“ 10 years.

The term Loan can be availed to Purchase of Fixed Assets

Mortgage Term Loan

A Term Loan can be availed by mortgaging a kind of security like home,

A bank guarantee might be revoked by the seller (beneficiary) when the

This instrument or method is often used in Selling, Buying or Service

Financial Guarantee : Financial Guarantee is a bond which is not cancelable

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