What is Bank Payment Undertaking (BPU)? Benefits, Process

Bank Payment Undertaking (BPU)- Benefits, Process, and Case Study

A Bank Payment Undertaking (BPU) is a formal and irrevocable commitment from a bank to pay a specified amount to a seller (the beneficiary) on behalf of a buyer. The payment is made once the seller meets certain conditions, such as submitting the right documents or delivering goods or services as agreed.

In international trade, BPUs are crucial because they provide assurance to sellers that they will receive payment once the agreed-upon conditions are fulfilled. This helps reduce the risks for both the buyer and seller in a transaction.

Key Features of a Bank Payment Undertaking (BPU):

Irrevocable Payment Commitment: Once issued, the bank is bound to pay, as long as all conditions are met.
Document-Based Assurance: Payment depends on the submission of specific documents like invoices, bills of lading, or inspection certificates, which prove that the seller has fulfilled their part of the deal.
Risk Mitigation for Sellers: Sellers can be assured that they’ll be paid, even if they have concerns about the buyer’s creditworthiness.
Conditional Nature: The bank will only release payment once it verifies that the required documents align with the terms outlined in the BPU.
Common Use in Trade Finance: BPUs are widely used in international trade to facilitate secure and transparent transactions.

How Does a Bank Payment Undertaking Work?

Agreement Stage: The buyer and seller agree on the terms of the transaction, including the issuance of a BPU.
Bank Involvement: The buyer’s bank issues the BPU in favor of the seller, committing to make payment once the conditions are met.
Document Submission: The seller submits the required documents to the buyer’s bank after fulfilling the terms of the deal.
Verification and Payment: Once the bank confirms the documents meet the specified terms, it releases the payment to the seller.

Key Points to Understand:

Purpose of BPU: A Bank Payment Undertaking ensures payment to a seller once certain conditions are fulfilled. It offers security to both the buyer and the seller during a transaction.
Cost of Issuance: Banks charge a fee for issuing BPUs since they’re taking on financial risk. These fees may include arrangement and processing costs.
Risk Management: The bank evaluates the risk of issuing a BPU and may require collateral or a credit facility from the buyer before moving forward.
Regulation and Policy: Financial instruments like BPUs are issued under strict regulations to ensure their integrity and prevent misuse.

Benefits of a Bank Payment Undertaking

For Sellers:

Guarantees timely payment, reducing risks in cross-border trade.
Provides confidence that payment will be made once the terms are met.

For Buyers:

Allows payment deferral until the seller meets delivery or documentation conditions.
Helps in fostering trust and smoother negotiations with sellers.

For Banks:

Provides a fee-based service, supporting clients’ trade and financial needs.

BPU vs. Letters of Credit (LC)

Criteria	Bank Payment Undertaking (BPU)	Letter of Credit (LC)
Nature	Irrevocable payment obligation	Payment guarantee with stricter terms
Document Focus	Document-based, more flexible	Rigid document verification required
Usage	Supply chain finance	Trade finance, imports/exports
Obligation	Payment upon document review	Payment linked to strict LC compliance

Bank Payment Undertaking (BPU) SWIFT Verbiage Example

Case Study: General Credit Finance Helps a German Company Secure a BPU

A Germany based manufacturing company, GlobalTech Industries GmbH, landed a significant contract to supply specialized machinery parts to a European buyer, worth EUR 50 million. While the buyer was reputable, the Germany company needed financial assurance to protect themselves from any potential payment risks.

Client’s Challenge:

Cash Flow Concerns: GlobalTech Industries GmbH needed upfront capital to source raw materials and begin production.
Buyer Payment Risks: They wanted a formal guarantee from the buyer’s bank to ensure payment after delivery.
Trust in International Trade: GlobalTech needed a reliable financial partner to structure the deal and manage the risk.

General Credit Finance’s Solution:

General Credit Finance and Development Limited, a leading provider of trade finance solutions, stepped in to structure a Bank Payment Undertaking (BPU) to secure the deal.

Steps Taken by General Credit Finance:

Client Assessment and Documentation:
- Verified the contract between GlobalTech and the European buyer.
- Collected necessary documents such as purchase orders, proforma invoices, and financial statements.
Arranging the BPU:
- Coordinated with a major international bank to issue an irrevocable Bank Payment Undertaking in favor of GlobalTech.
- The BPU guaranteed payment of eur 50 million upon submission of compliant shipping and delivery documents.
Pre-Production Financing:
- Used the BPU to help GlobalTech secure a short-term loan to fund raw materials and production costs.
Execution and Delivery:
- After completing production, GlobalTech shipped the machinery parts and submitted the required documents to the bank.
- The bank verified the documents and made the payment to GlobalTech.

Outcome:

Risk Mitigation: GlobalTech was assured of payment, which significantly reduced their financial exposure.
Improved Cash Flow: The BPU facilitated pre-production financing, allowing smooth operations.
Successful Contract Fulfillment: GlobalTech met the delivery deadlines, strengthening its relationship with the European buyer.

Client Testimonial: “General Credit Finance provided us with a seamless, structured financial solution. The Bank Payment Undertaking gave us the confidence to execute one of our largest international contracts without payment concerns. Their trade finance expertise made all the difference.” – Heidi Muller, CEO, GlobalTech Industries GmbH

Conclusion:

A Bank Payment Undertaking (BPU) is a secure payment instrument that ensures sellers are paid once conditions are met, making it an ideal tool for minimizing risks in international trade. It offers flexibility and security for both parties involved, streamlining transactions and building trust.

Ready to Secure Your Next International Deal?

Partner with General Credit Finance and Development Limited for customized trade finance solutions like Bank Payment Undertakings (BPU), bank guarantees, standby letters of credit, business loans, and more.

Since our incorporation in 1973, we’ve been the trusted choice for businesses globally, offering tailored financial solutions to Ensure smooth transactions, secure payments, and business growth.

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What is Bank Payment Undertaking (BPU)? Benefits, Process, and Case Study