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Types and Functioning of Bank Guarantee

Oct 18, 2017
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Businesses may require guaranteeing payments. The providing bank guarantee is one of the best ways to do so. It will give creditor the guarantee for payment after completion of transaction. This is a kind of warranty provided by a bank to individuals for providing loans, fee (payment) or set of services for initiating a business activity.

Understanding Bank Guarantee

Bank guarantee is a kind of indemnity or surety provided by a financial organization or bank that they will repay the liabilities and debts acquired by a business entity or an individual when they are unable to do the same.

The process allows a business to expand by accepting payment for services and goods they use presently towards a later date. A bank guarantee facilitates a business to invest on a larger scale as compared to without having a bank guarantee.

Candidates for Bank Guarantee

By providing a guarantee, a bank offers to honor any payment to the creditors upon receiving a request. This requires that the financial institution be very sure of the business or individual to whom the bank guarantee is being issued. So, banks run risk assessments to ensure that the guaranteed sum can be retrieved back from the business. This may require the business to furnish a security in the shape of cash or capital assets. Any entity that can pass the risk assessment and provide security may obtain a bank guarantee.

The Functioning of Bank Guarantees

The system for providing bank guarantees work like this:

Step 1: Both creditor and applicant determine that there is a requirement for a bank guarantee.

Step 2: Applicant contacts a financial organization for issuing creditor, a bank guarantee.

Step 3: The bank will run a risk assessment. It will also demand a security.

Step 4: The applicant needs to furnish the bank and security. The financial organization processes bank guarantee.

Step 5: The bank guarantee will be sent to the bank of creditor or creditor. The applicant may also be asked to collect the bank guarantee personally to provide it to their creditor.

Benefits of Bank Guarantee

A lease bank guarantee or bank guarantee offers the following business benefits:

– An individual is allowed to accept payment for services or goods acquired on the basis of the security given by the bank guarantee.

– All of the money is not engaged in a single project. This money can be spread around.

– Cash will be available for exploring business prospects and expanding it too.

Purpose of Bank Guarantees

Usually, Bank Guarantee can be categorized into two types:

Direct Bank Guarantee – This guarantee is issued by the bank of account holder directly in favor of the Beneficiary.

Indirect Guarantee – The guarantee is issued by a second bank in response to a counter-guarantee.

Usually a financial organization offers varied types of bank guarantees. These include the following mentioned below:

Advance Payment Bank Guarantee

The guarantee safety of advance payment made to sellers by buyers. In the event seller cannot deliver goods or service, buyers can acquire his money back.

Performance Bond or Performance Guarantee

These bonds serve as collateral for losses suffered by the buyer when seller’s performance is substandard.

Order and Counter Bank Guarantee

The bank guarantee is a kind of indemnity provided to a creditor by debtor to ensure protection against the failure to fulfill a requirement as written in a contract. The creditor reserves all rights to demand the payment back in case of a default.

Payment Bank Guarantee

The guarantee is provided to seller, certifying the payment by a prearranged date.

Bank Guarantee Securing Credit Line

It is a kind of surety provided to the creditor on claims against debtor. This is done in the event a loan remains unpaid as mentioned in the agreement.

Conditional Payment Undertaking

It serves as an instruction to the bank from the account holder towards paying a sum of money towards a creditor once certain conditions are fulfilled. It is a post contract instrument used toward paying off agents and contractor once the project is completed.

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