Non-fund-based
The bank's assurance stands behind an obligation; no cash is disbursed to you.
Business & working capital · Loan guidance
Bank guarantee & letter of credit, explained.
Non-fund-based facilities: the bank's word stands in for your money in a contract or a trade.
What it is
The instrument, in plain terms.
A bank guarantee is the bank's assurance of your performance; a letter of credit is the bank's assurance of payment in trade. Both are limits, not cash disbursed to you.
It can suit
- Contractors and businesses with performance or advance-payment obligations.
- Traders who need payment assurance to buy or sell across borders.
- Businesses with the underlying contract or order to support the limit.
It may not suit
- Businesses without an underlying contract or trade to justify the facility.
- Requirements that are really cash funding rather than an assurance.
The lender’s view
How a lender reads this.
The underlying contract
The order, contract or trade documents are the foundation of the facility.
Margin and security
A margin deposit or security is usually required, and it ties up funds.
Limit structure
Fund-based and non-fund-based limits often share a single overall exposure.
Charges and validity
Commission, validity periods and renewal terms all form part of the cost.
Lenders decide on their own assessment. Our work is to make your case complete, consistent and genuinely ready to be read.
Our work
What we prepare with you.
Contract and trade documents ready, with obligations clearly understood.
A margin plan, since the deposit reduces available working funds.
Awareness of what happens if the guarantee is invoked or the payment is called.
Validity and renewal dates diarised, with charges accounted for upfront.
Preparation
What a lender usually asks for.
- The underlying contract, purchase order or trade documents.
- A request specifying the amount, the beneficiary and the validity period.
- Margin or security documents, as required by the lender.
- Financials and details of existing facilities.
- Identity, address and guarantee documents.
- Trade documents such as invoices and shipping papers, for letters of credit.
Mechanics
How it is usually structured.
The shape a lender will typically put around this facility.
Margin
A deposit or security is usually required, tying up funds for the instrument's validity.
Shared exposure
Fund-based and non-fund-based limits typically share one overall exposure with the lender.
Common mistakes
Where borrowers go wrong.
None of these are exotic. They are the ordinary errors that turn a workable requirement into a difficult application.
Ignoring invocation risk
A guarantee called on is a real payment, not a formality.
Missing validity and renewal dates
An expired instrument can stall the very contract it was issued for.
Under-planning the margin
The funds locked as margin are the hidden cost of non-fund-based limits.
The full cost
What it costs, beyond the rate.
- Commission
- A periodic charge on the guaranteed amount, for the instrument's validity.
- Margin funding
- Funds held as margin are unavailable for operations during that period.
- Amendment and extension
- Charges each time validity or terms are changed.
- Invocation
- If the guarantee is called, it becomes a real payment and a fund-based liability.
Language
Terms worth knowing.
- Bank guarantee
- The bank's commitment to pay if the business fails to meet an obligation.
- Letter of credit
- The bank's assurance of payment to a seller, on agreed conditions.
- Invocation
- A claim made on the guarantee when the underlying obligation is not met.
On rates
Why we don’t publish a single rate.
Pricing is set by each lender, not by us. Two borrowers approaching the same lender on the same day can be offered different rates, because the number reflects both the facility and the person behind it.
What moves the rate you are offered:
- Your credit record and how past borrowing has been serviced.
- The security offered, and how readily it could be realised.
- The tenure and the structure of the facility.
- Your income or business profile, and how well it is documented.
- The lender’s own cost of funds and internal policy.
- Fees, insurance and margin that belong in the all-in cost, not the headline.
A single advertised rate would misrepresent all of that. What we do instead is help you compare the whole cost, and understand what is actually negotiable in your case.
Questions borrowers ask
Is a guarantee a loan?
- No, until it is invoked. But it is a contingent liability, and can become one immediately if called.
Why does margin matter so much?
- Because cash locked as margin would otherwise fund your operations. That is the real cost of a non-fund-based facility.
What happens if validity lapses?
- The instrument expires, which can stall the very contract it was issued for — and extensions carry charges.
Adjacent borrowing
Related options.
Borrowers considering bank guarantee & letter of credit often weigh these alongside it.
Cash credit
A running working-capital limit drawn against stock and receivables, renewed periodically.
↗Overdraft
A limit on a current account you can dip into as needed and clear as money comes in.
↗Business loan
Funding for a running business, read from turnover, banking and vintage rather than from a single asset.
↗Begin here
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The Loan CA prepares and advises; it does not lend and cannot promise an approval. Every credit decision rests with the lender, subject to their assessment, documentation and applicable terms. The Loan CA is not licensed, registered or regulated by the Reserve Bank of India, and is not approved, endorsed by, or affiliated with the RBI or the Institute of Chartered Accountants of India (ICAI). Full disclosures →