BANKING INSTRUMENTS

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At Goldmann and Sons PLC we can put you in touch with finance experts who can guide you through the process when either buying, selling or creating an instrument. Options available include:

Bank Guarantee

A bank guarantee is a promise to cover a loss if a borrower defaults on a loan. The guarantee therefore lets a company buy what it otherwise could not, helping business growth and promoting entrepreneurial activity. For example, a new restaurant wants to but £3 million in kitchen equipment. The equipment vendor requires a bank guarantee to cover payments before shipping the equipment. The purchase contract is then co-signed by the bank guarantee provider with the vendor.

Standby Letter of Credit (SBLC)

This document serves as a guarantee: the bank promises to pay a “beneficiary” if something fails to happen. Standby letters of credit can be used for international trade as well as domestic transactions in your home country. The letter of credit provides security from the bank, which is presumably a disinterested third party. If the bank’s customer fails to do something (like pay on time, complete a project on time, or satisfy certain terms of an agreement) the bank – not the customer who failed to deliver – pays the beneficiary.

Letter of Credit (LOC)

A Letter of Credit is a document from a financial institution that guarantees payment. While there are several types of letters of credit, they are often used when buying and selling: if a buyer fails to pay a seller, the bank that issued a letter of credit will pay the seller (assuming all requirements are met).

Promissory Note

A promissory note is a financial instrument that contains a written promise by one party (the note’s issuer or maker) to pay another party (the note’s payee) a definite sum of money, either on demand or at a specified future date. A promissory note typically contains all the terms pertaining to the indebtedness, such as the principal amount, interest rate, maturity date, date and place of issuance, and issuer’s signature. Although financial institutions may issue them (see below), promissory notes are debt instruments that allow companies and individuals to get financing from a source other than a bank. This source can be an individual or a company willing to carry the note (and provide the financing) under the agreed-upon terms. In effect, anyone becomes a lender when he issues a promissory note.

Loan Note

A Loan Note is an extended form of an “IOU” from one party to another that enables a payee to receive payments, possibly with an interest rate attached, over a set period of time, ending with the date at which the entire loan is to be repaid. Loan Notes are usually provided in lieu of cash at the payee’s request. A Loan Note, a form of promissory agreement, includes all of the associated loan’s terms. It is considered a legally binding agreement, with both parties considered committed to the terms as they are written. A Loan Note can be drawn up by either involved party, though it is more traditionally completed by the lender. The Note is considered valid until the amount listed on the document is paid in full by the borrower.

Letter of Intent (LOI)

Used in most major business transactions, a letter of intent (LOI) outlines the terms of a deal and serves as an “agreement to agree” between two parties. An LOI is similar to a term sheet in its content, but differs in structure (one formatted as a letter; the other, as a list of terms). The real utility of a letter of intent is that it formalizes a preliminary agreement on a topic before negotiations get underway, it outlines what can and can’t be talked about outside of that negotiation, and it provides a roadmap that describes how things will proceed. A letter of intent can include provisions that are both binding and non-binding. The ways in which a letter of intent can be binding vary. Some of the least binding LOIs essentially contain a contractual agreement to treat the LOI as non-binding. Some more binding LOIs can include the rules of negotiation of a contract as a binding agreement. Or an LOI can specifically spell out elements of an agreement (for example, a date for deal to be finished, who will write the contract, specifics on financing); these usually include a condition requiring these points to be approved by a board. One of the most binding types of letters of intent, also known as “failed letters of intent,” betray the entire concept of a letter of intent and serve as a contract in their entirety. A letter of intent should bring parties together and help lay out terms as a way to reduce the risk of litigation.

Bill of Exchange

A Bill of Exchange is a legally binding, written document that orders a certain party to pay a specific amount of money to a second party. Some Bills of Exchange may say that the money is due on a predetermined future date, or they may state that payment is due on demand. It’s used in the transaction of goods and services. The Bill of Exchange is signed by the party that owes money (the payer) and given to the party entitled to the money (the seller or payee), who can then use it to fulfill a contract for payment.  However, the seller may also endorse the Bill of Exchange and transfer it to someone else, thereby passing the payment on to another party. Note that when a Bill of Exchange is issued by a financial institution, it’s often called a bank draft. When it’s issued by an individual during a transaction, it’s referred to as a Trade Draft.

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