Shipping guarantee

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Shipping guarantee (SG) is given by the bank on behalf of the customer to the shipping company until original shipping documents will be delivered. Shipping company lets the customer to release delivery on the base of the shipping guarantee and there is no requirement to create original bill of landing. It is special application form signed off by both customer and bank [1]:

  • In most of countries, this is procedure used on daily basis,
  • Shipping guarantee does not have expiration date,
  • To fulfil the whole procedure letter of credit is also used,
  • Usually it is used for import transactions.

Reason of using shipping guarantee

Reason behind creating shipping guarantee is that sometimes goods arrive but documents has not arrived yet. For example, goods arrived within two or more days from order, but shipping documents were delivered week or even two later. Without shipping guarantee, demurrage charges might be raised because the importer cannot release delivery immediately without proper documentation. Usually shipping companies use so called grant period during which penalty would be not raised, but sometimes there is no guarantee when exactly documents will arrive. To solve this uncertainty, bank offer service called shipping guarantee[2]. Another reason is that the importer does not risk delays, cause truck can drive to another place and lead time is met [3].

Bank perspective on shipping guarantee

Before signing shipping guarantee form, bank requires protection for example full margin. Banks rely on invoice received from customer or ask customer about the value of delivery [4] . Banks proposes that service to companies that can rely on (for example organisation that have positive history of transactions) [5]. Shipping guarantee is supported with special fund as part of investment support of policy financial institutions [6]. In business banking such investment is treated as trade facility [7].

Examples of Shipping guarantee

  • A shipping guarantee is a contract between a customer and a bank that is used to secure payment from the customer to a shipping company. The bank agrees to make payment on behalf of the customer if the customer fails to make payment for goods that have been shipped. This type of guarantee ensures that the shipping company will be paid for goods that have been shipped, even if the customer fails to make payment.
  • A shipping guarantee can also be used to secure payment for services that are rendered by a shipping company, such as storage or handling of goods. In this case, the bank agrees to make payment on behalf of the customer if the customer fails to make payment for the services rendered. This type of guarantee ensures that the shipping company will be paid for services that have been provided, even if the customer fails to make payment.
  • In some cases, a shipping guarantee can be used to secure payment for the delivery of goods. In this case, the bank agrees to make payment on behalf of the customer if the customer fails to make payment for the delivery of goods. This type of guarantee ensures that the shipping company will be paid for delivery of goods, even if the customer fails to make payment.

Advantages of Shipping guarantee

Shipping guarantee (SG) is a document signed by the bank on behalf of the customer and presented to the shipping company. It provides certain advantages to the customer, such as:

  • Reduced paperwork: SG eliminates the need for the customer to create original bill of landing, therefore reducing paperwork.
  • Reduced cost: SG eliminates the need to involve third-party services, such as customs brokers, thus reducing costs.
  • Time savings: SG provides the customer with an easier and faster way to release delivery and save time.
  • Security: SG provides the customer with security as it is backed by the bank and therefore ensures that the customer's goods are protected.

Limitations of Shipping guarantee

Shipping guarantee (SG) has some limitations which should be taken into consideration before its application. These limitations include:

  • The guarantee is only applicable for the original shipment documents, and not for any other documents, including copies.
  • The shipping guarantee binds the customer to the terms and conditions of the contract, and any disputes arising from violation of the contract will be decided in the court of law.
  • The customer must provide full and accurate information regarding the shipment and related documents to the bank.
  • The guarantee is valid only for the amount specified in the guarantee and can not be extended.
  • The bank cannot guarantee the quality of the shipment and is not responsible for any losses due to defects in the shipment.
  • The guarantee is valid only if the documents are returned to the bank within the specified period of time.
  • The bank is not liable for any losses or damages incurred by the customer due to delays or non-delivery of the documents.
  • The bank reserves the right to amend or terminate the guarantee at any time without prior notice.

Other approaches related to Shipping guarantee

Shipping guarantee is a financial instrument that is used as a payment assurance between shipping companies and customers. It is used to ensure that payment will be made upon delivery of goods. Other approaches related to Shipping guarantee include:

  • Letters of Credit: A letter of credit is an agreement between a customer and a bank, which guarantees payment to a seller if the terms and conditions of a transaction are met. The bank will pay the seller on behalf of the customer and will then collect the payment from the customer.
  • Bank Guarantees: A bank guarantee is a promise from a bank to guarantee payment for a good or service delivered. The bank will pay the seller if the customer does not pay, thus providing the seller with a guarantee that they will be paid for the goods or services they have provided.
  • Documentary Collections: Documentary collections are a way of providing payment assurance to the seller. When a customer pays for goods or services, the bank will collect payment from the customer and then forward the payment to the seller.

In summary, Shipping guarantee is a financial instrument that is used as a payment assurance between shipping companies and customers. Other approaches related to Shipping guarantee include Letters of Credit, Bank Guarantees and Documentary Collections.

Footnotes

  1. Luk K. W., (2011), p. 128; Reuvid J., Yong L., (2006), p. 426; Hossain M., (2018), p. 46-47
  2. Luk K. W., (2011), p. 128
  3. Hossain M., (2018), p. 46
  4. Koh K. L., Soe M., Cheang M., (1976), p. 442
  5. Reuvid J., Yong L., (2006), p. 426; Hossain M., (2018), p. 46-47
  6. Park K. S., Seo J. Y., Kim A. R., Ha M. H, (2018), p. 7
  7. Alliance Financial Group Berhad, (2016), p. 5


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Transferable letter of creditCollecting bankReimbursing bankPayment guaranteeBack-To-Back Letters Of CreditSea waybillRetention bondDocuments against acceptanceContract guarantee

References

  • Alwi S. F. A., Osman U., Ibrahim U., Sawari M. F., (2016), Examnining issues on Islamic shipping guarantee in "Procedia - Social and Behavioral Sciences Volume 219", Elsevier
  • Alliance Financial Group Berhad, (2016), 2016 Annual Report, Alliance Financial Group Berhad
  • Hossain M., (2018), International Trade and Foreign Exchange for Banking Diploma. IBB Digest, Md Murad Hossain
  • Koh K. L., Soe M., Cheang M., (1976), The penal codes of Singapore and States of Malaya: cases, materials, and comments, Volume 2, Law Book Co. of Singapore & Malaysia
  • Luk K. W., (2011), International Trade Finance: A Practical Guide (2nd Edition), City University of HK Press
  • Park K. S., Seo J. Y., Kim A. R., Ha M. H, (2018), Ship Acquisition of Shipping Companies by Sale & Purchase Activities for Sustainable Growth: Exploratory Fuzzy-AHP Application in "Sustainability 2018, 10, 1763; doi:10.3390/su10061763"
  • Reuvid J., Yong L., (2006), Doing Business with China. Doing Business With Series Global market briefings, GMB Publishing Ltd

Author: Kinga Kutek