What are non-fund based limits?
A bank guarantee (BG) or letter of credit (LC) is a commitment by a bank on your behalf. No money leaves the bank unless the guarantee is invoked or the LC is paid, which is why these are called non-fund based facilities. They are essential for contractors, EPC companies, importers, exporters and suppliers to large buyers.
Types of bank guarantees
- Performance guarantee – assures the buyer that you will complete the contract as agreed.
- Financial guarantee – assures payment of a financial obligation.
- Bid bond / earnest money guarantee – replaces cash EMD when bidding for tenders.
- Advance payment guarantee – secures a mobilisation or advance received from a client.
Letters of credit and SBLC
An import LC lets your supplier ship with the assurance of bank payment, often allowing you usance (credit) days. An inland LC does the same for domestic purchases. A standby letter of credit (SBLC) works like a guarantee and is commonly used in international transactions.
What banks look at
Because BGs and LCs are credit exposures, lenders assess them much like a loan: financial strength, order book, execution track record, existing limits and security. Banks typically ask for a cash margin (often a fixed deposit) plus collateral. The mix of margin and collateral is negotiable, and a well-presented proposal can significantly reduce the cash you need to block.
How NexKred helps
- We assess the BG and LC volumes your order book and purchases actually need.
- We structure the limit — sanctioned alongside working capital or on a standalone basis — and identify lenders with appetite for your sector.
- We negotiate margin, collateral, commission and validity, and support you through documentation and issuance.
Frequently asked questions
What is the difference between a bank guarantee and a letter of credit?
A bank guarantee pays the beneficiary only if you fail to perform or pay. A letter of credit is a payment mechanism: the bank pays the seller when the documents presented meet the LC terms.
Can I get a bank guarantee without 100% cash margin?
Often, yes. Banks sanction BG limits against a combination of cash margin and collateral based on your credit profile. We work to structure limits that reduce the cash you need to block.
Who needs BG and LC limits?
Contractors and EPC companies bidding for tenders, importers and exporters, suppliers to large corporates and PSUs, and any business whose counterparties ask for a bank-backed assurance.
What is an SBLC?
A standby letter of credit is a bank undertaking to pay if the applicant defaults. It is commonly used to support international trade and financing transactions.