Introduction:
A bank guarantee is a legal document or formal assurance issued by one institution that confirms the debtor’s obligations will be met. Simply put, if a borrower fails to repay a debt, the bank will step in and take on the buyer’s liabilities.
What does a bank guarantee refer to?
A bank guarantee is a financial institution’s promise to pay a specific amount of money to an individual or trader on its client’s behalf. If the customer is unable to meet any contractual or legal commitments to a third party, the bank will step in to complete the transaction.
In a guarantee, there are several parties involved:
- Surety: the one who provides the guarantee.
- Principal Debtor: the one for whom the guarantee is given.
- Creditor: the one to whom the guarantee is provided .
Benefits of Bank Guarantees :
Bank guarantees offer numerous benefits in various ways:
- They eliminate the financial risk associated with business transactions.
- Due to the reduced involvement of risk, they enable beneficiaries to expand their businesses on a credit basis.
- Banks usually charge lower fees for bank guarantees compared to other trades, which also provides a strong foundation for small-scale businesses to grow .
- Typically, bank guarantees require fewer documents and are processed quickly.
List of Important Types of Bank Guarantees :
Bank guarantees serve as tools that allow traders to conduct their business smoothly in the international market.
1) Performance Guarantee :
- This guarantee is issued concerning the performance of a contract or any obligation. In the case of non-performance, the bank will be required to cover any monetary losses.
2) Financial Guarantee :
- In this type, the bank issues guarantees regarding the financial liabilities of its constituents. Guarantees may be provided in favor of customs authorities. Bank guarantees may also be issued in favor of tax authorities. Additionally, they can be provided concerning any dispute liabilities.
3) Deferred Payment Guarantee :
- Deferred payment guarantees, working on behalf of their borrowers to acquire capital assets, should ensure that the total credit liability, including the proposed deferred payment guarantee, does not exceed the prescribed ceilings.
4) Advance payment guarantee:
- In this case , the seller will receive an amount as an advance payment; this guarantee ensures that the buyer will get their money back if the seller does not provide the services or products on time.
5) Bid bond guarantee:
- The bank will facilitate the bidding process under this type of guarantee. This bidding process will only be conducted on behalf of the business owner, whether for an industrial or construction project or similar contracts.
Eligibility Process for Bank Guarantee:
- Any individual whose background or financial condition is sound, or whose record is clear, is eligible to apply for a bank guarantee.
- It can be applied for by any business firm at its own bank or at any other bank offering such services.
- Before approval, banks first analyze all previous banking history, creditworthiness, and other relevant factors.
- Banks also examine the value, beneficiary details, and currency required for approval. In such cases, banks will require a form of security from the applicant to cover the bank guarantee value.
- Once the bank officials are satisfied with all related criteria, they will provide the necessary application required for bank guarantee processing.
- Generally, bank guarantee charges are based on risk and may vary from bank to bank; the charges may differ from country to country, typically ranging between 0.75% to 1.5%.
Conclusion:
In summary, a guarantee is essentially security provided by a lending or financial institution (bank) to traders, along with surety and guarantee for various business obligations on behalf of their customers within certain norms. It is an assurance to a beneficiary that the financial institution will uphold all contracts made with the customer and complete all processes accordingly.