A shipping guarantee is a form of indemnity issued by the bank to a shipping company to allow the consignee to pick up their goods without their bill of laden. The consignee and the bank will jointly agree to indemnify the shipping company of any losses they may incur in delivering their goods. They also undertake to hand over the Bill of Laden once it has been received.
When it comes to international trades, banks deal with documents and not the traded goods. However, these documents are an essential part of the trading process since they represent the goods’ sales.
If the shipping documents are not available, it puts the seller at risk of loss since he cannot deliver his goods. This is especially true when dealing with perishable goods.
To ensure the seller succeeds in delivering their wares, a bank-issued shipping guarantee is in their favor.
Why Shipping Guarantee Is Important?
We’ve listed some of the importance of shipping guarantees without insurance. Check them out!
Saves Cost
Once your goods arrive at the port, you are expected to pick them up within a stated timeframe, often referred to as a “grace period.” When this grace period elapses, you will be charged a fee for leaving your goods at the port.
This charge is called demurrage. Customs make a lot of profit off demurrage charges; sometimes, the fee may surpass the cost of the container itself.
A shipping guarantee can help you save costs by avoiding demurrage. Even if your goods get to the port before your original shipping documents, you can still offload them and begin selling.
Improves Cashflow
The direction of inflow in the shipping business is inflow first and outflow later. This improves the net cash flow and liquidity of the seller.
Reduces Tied Down Capital
One great thing about a shipping guarantee is that it relieves tension on your capital. We’ve seen cases where people invest a lot of capital to purchase goods from foreign countries but cannot sell them due to many factors, such as having their goods in the custody of customs.
With a shipping guarantee, you can declare your goods to the customs and transport them from the port to your warehouse or store. This allows you to make sales and recover profits before making any payments/
Grasp Market Opportunity / Saves Time
There is a saying that opportunity knocks once; suppose you have conducted some market research and discovered an untapped opportunity in the industry.
Such an opportunity may require you to import some goods to take full advantage. Unfortunately, however, your goods arrive weeks before the shipping documents do, and you have lost out on a profitable opportunity.
You can avoid this with the aid of a shipping guarantee. With it, you can pick up your goods and grasp potential market opportunities.
While the benefits of using a shipping guarantee are enough to make anyone smile, this does not mean it is all roses and sunshine. Because there are two sides to every story, even a shipping guarantee has disadvantages.
The major risk with using a shipping guarantee is using a wrong estimation to document the worth of the goods.
It is possible that when the original shipping documents arrive, the price on the invoice will be higher than the price estimated.
When To Use Shipping Guarantee
Not all international trades require you to get a shipping guarantee from your bank. However, from the definition of the term, you should identify when a shipping guarantee is necessary.
You only need a shipping guarantee when you are yet to receive your original Bill of Lading but want to take possession of your goods.
When you receive the original Bill of Lading, you are expected to notify the shipping company and replace the shipping guarantee with this document. The shipping guarantee will then be returned to the issuing bank for cancellation.
A letter of credit is a guarantee from the bank that the seller/lender will receive their payment in full when due from the buyer/borrower. It also states that if the buyer cannot make payment on their purchase, the bank will cover the balance of the amount owed.
In summary, a letter of credit is an obligation to the bank to make payment on behalf of the buyer/borrower if certain conditions are met.
On the other hand, the bank issued a shipping guarantee to allow the consignee to pick up their goods before the arrival of the original shipping documents.
| Bill of Lading | A document that lists the items in a ship’s cargo in the form of a receipt. The master of the ship issues it to whoever is consigning the goods. |
| Demurrage | A charge payable for failure to offload a ship within a stipulated time frame |
| Letter of Credit | A guarantee that the bank will cover the balance on a buyer’s/borrower’s payment to the seller/lender |
| Letter of Guarantee | A document issued by the bank stating that the supplier will be paid as at when due, I.e., if the buyer cannot make the payment, the bank will pay |
Frequently Asked Questions
Why Is A Shipping Guarantee Required?
A shipping guarantee is required because it makes the importation process faster and smoother. With it, buyers can cut costs and take advantage of potential market opportunities by offloading their goods from the port without their original shipping documents.
What Is A Guarantee Letter?
A letter of guarantee is a document issued by a bank stating that the bank will compensate a supplier for their goods and services in a situation where you cannot make such payment yourself.
It is easy to confuse this with a letter of credit, but they are different documents. The major difference is that a letter of credit is effective when certain conditions are met, while a bank guarantee is effective when certain conditions are not met.
Conclusion
A shipping guarantee is an essential instrument when it comes to international trade, and the benefits of using it for your dealings outweigh the disadvantages by far.
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