Bank Instrument

Bank Instrument Uses

A Bank Instrument can be used for a whole variety of purposes. They are used in trade finance, global finance, project finance, credit enhancement, and so on. Getting access to these financial instruments is another matter.

In order to do an equity purchase one must have established banking relationships and significant financial wherewithal. Costs can range anywhere from 40-100% of face value. When considering an instrument in the millions taking ownership outright of a financial bank instrument is beyond most people’s reach.

Lease Bank Instrument Makes it Possible

There is another way: Lease Bank Instrument. Most persons at financial institutions do not understand the nature of leased financial instruments. However, banking institutions utilize the principles of financial asset leasing quite frequently and have for some time.

The concept is simple. Gain access to another party’s financial assets for a fee or other consideration for a set term. Once the term is up the instrument is either returned to the original asset holder or the bank instrument is extended for another term.

Either the asset holder does a joint ownership with the borrower, or the instrument is transferred in ownership outright during the leased bank instrument term. This way there is no issue with the title of the instrument.

During the term of the instrument lease, the bank asset is made available with all the same rights as if the bank instrument were acquired through an equity purchase. For all purposes intended, the new owner may deliver, lien, encumber, monetize, collateralize, and use the instrument as security. The only thing not available without permission from the original asset holder is a sale. The instrument may not be sold to any new owner.

Lease Bank Instrument Transactions Are Cheaper

A party can gain access to a financial bank instrument with much less capital investment: Usually the fees range anywhere from 1 to 3 percent a month to 15 to 17 percent per year. This makes leased financial instruments a much more accessible investment.

However, having the necessary capital is not the only consideration a borrower must consider. The asset holder will want to ensure the leased bank instrument is returned at the end of the term free of any liens or encumbrances. This means any loans, guarantees, and obligations against the debt asset are released prior to the term expiration.

It is not enough to provide a personal or corporate guarantee. Most asset holders require a bank undertaking that clearly illustrates a bank commitment the instrument will be returned free and clear. And still, not any bank undertaking will do. Usually the bank commitment must come from a financial institution given high ratings from a respected rating agency like Standard & Poor’s.

The terms and conditions of the borrower agreement will vary from asset holder to asset holder and transaction-use to the next. Generally speaking, with a highly rated bank undertaking providing the guaranteed safe return of the bank instrument, the borrower becomes the owner in fact of the asset and may use it in almost all ways they would had they had equity ownership.

In this way the leased bank instrument is similar to a home leasing, or auto leasing. The only thing the owner cannot do is sell the asset.

Lease Bank Instrument Considerations

Some common problems parties to a leased bank asset may encounter are disclosure of the nature of ownership with a third party. In other words, you would not have a leased home or car and list it as an owned asset outright. Neither would you list a home with a mortgage loan against the title and claim it is a home free and clear. Proper disclosure of the nature of the ownership is crucial in finance. False representation can not only waste time in a transaction, but it can also be construed as willful intent to misrepresent and defraud the nature of a financial asset, which is a financial securities crime.

When going into a financial transaction it is wise to represent clearly to all parties involved the nature of ownership of the instrument. If one of the parties has never worked with a leased bank instrument educating them of the viability of the financial asset is advised. If for whatever reason the party still does not agree finding another party who has successful history with them is advised.

Balboa Trade provides intelligent financial solutions for gaining access to debt-owned standby letters of credit and other financial assets. We not only can make provisions for getting access to the instruments provider, but we can also assist with utilizing it for bank instrument funding and loans.

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