UP Front Performance Bond
Agent asks: Can an up front Performance Bond be issued by seller?
Answer: Yes but it is never done.
Banks use an SBLC as a performance bond.
Because the SBLC (Standby Letter of Credit) usually has verbiage in it that says “callable on first demand”, banks think of it as the same as sending cash.
So why should the seller, who has the product send cash to a buyer just to see if the buyer has the money to make the crude oil purchase.
For every buyer that has the cash to make the purchase there are 1000 that do not. $100 million is a lot of money for even the strongest business.
So when a seller sends the buyer’s bank a PB first, the buyers bank then uses that PB to draw the financing required for the buyer to make the purchase.
This allows a buyer without any money to use the sellers product and the seller’s money to finance the deal.
Nigerian buyers are not going to send anybody cash to find out if the Buyer has any money. They are too street-wise to do so.
It really does not matter if the buyer has money or not – what matters is, is the buyer willing to use his own money to make the purchase.
Nigerians look at the business like this, “We have the product, the buyer is supposed to have the money. If the buyer does not have any money then he is not a buyer. Tell him to go away.”
The reseller’s role is to finance the logistics to get the product from the seller to the buyer. If the reseller asks for an up-front PB they are announcing that they don’t have any money and therefore are providing no value in the supply chain.
Buyers that ask for an up-front PB are seen by me to be sophisticated purchasers that are not willing to use any of their own money to make a purchase. They think they are so smart they don’t need any money to buy.
When a buyer can not bring what is expected of him to the table then they are worthless, and that is the easiest way for a buyer to disqualify themselves.
Jeff Scott – CFO – Author