Bank Guarantee

Introduction to a Bank Guarantee

A bank guarantee is a type of financial assurance provided by a bank or a lending institution. The bank guarantee means that the lender will ensure that the liabilities of a debtor will be met. If the deter fails to meet payment, the bank steps in to cover the loss. This backing allows the debtor to secure loans and engage in business transactions. They might otherwise not qualify on their own.

Key Points

Direct guarantees are often used in international deals.
A bank guarantee is a promise by a leading institution to cover losses if the borrower defaults
The guarantee provides additional risk to the lender, so loans with such a guarantee will come with higher fees or interest rates.

Understanding Bank Guarantees

A bank guarantee supports both domestic and international transactions by offering confidence to sellers and service providers. The guarantee lets a company buy what it otherwise could not, helping businesses grow.

Types of Bank Guarantees:

Direct Guarantees:

They are issued directly by the bank to the beneficiary. They are often used in both domestic and international trade.

Indirect Guarantees:

These are commonly used in export transactions, especially when the government agencies or public agencies are beneficiaries of the guarantee. Many countries do not accept foreign bank guarantees because of legal issues.

Examples of bank guarantees

Payment guarantee
Advance payment guarantee
Credit security bond
Confirmed payment order
Performance Bond
Warranty bond