Bank Guarantee to Secure Loan

Reasons for Bank Guarantees, Sblc and How to Get One

A bank guarantee serves as a promise from financial instrument providers through a commercial bank that it will assume liability for a particular debtor if its contractual obligations are not met. In other words, the bank offers to stand as the guarantor on behalf of a business customer in a transaction. Most bank guarantees carry a fee equal to a small percentage amount of the entire contract, normally 5 to 36 percent of the guaranteed amount.

Requesting for a Sblc and Bank Guarantee

Bank guarantees are not limited to business customers; individuals can apply for them as well. However, businesses do receive the vast majority of guarantees. In most cases, bank guarantees are not particularly difficult to obtain. To request a loan, the account holder contacts the bank or investor and fills out an agreement that identifies the amount of and reasons for the guarantee. Typical applications stipulate a specific period of time for which the guarantee should be valid, any special conditions for payment and details about the beneficiary. Sometimes the bank requires collateral, this is where the sblc or bank guarantee letter become useful. This can be in the form of a pledge agreement for financial assets by the provider, such as stocks, bonds, or cash accounts. Illiquid assets are generally not acceptable as collateral that is why you need a standby letter of credit to help secure the loan.

Why Bank Guarantees Work and Who Uses Them

There are several different kinds of bank guarantees, including:

  • Financial guarantees
  • Advance or deferred payment guarantees

A financial sblc guarantees payment for goods or services as specified by an agreement. An oil refining company, for example, might arrange for such a letter to reassure a seller of crude oil that it can pay for a huge delivery of crude oil. The performance sblc, which is less common, guarantees that the client will complete the project outlined in a contract. The bank agrees to reimburse the third party in the event that its client fails to complete the project.

  • Assure a seller that a purchase price will be paid on a specific date.
  • Function as collateral for reimbursing advance payment from a buyer if the seller does not supply the specified goods per the contract.
  • A credit security bond that serves as collateral for repaying a loan.
  • Rental guarantee that serves as collateral for rental agreement payments.

The procedure for obtaining a sblc is similar to an application for a loan. The bank issues it only after appraising the creditworthiness of the applicant. Letters of credit are primarily used in global transactions, bank guarantees are often used in real estate contracts and infrastructure projects.

Letters of credit are especially important in international trade due to the distance involved, the potentially differing laws in the countries of the businesses involved, and the difficulty of the parties meeting. Bank guarantees represent a more significant contractual obligation for banks than letters of credit do. A bank guarantee, like a letter of credit, guarantees a sum of money to a beneficiary.

For instance, a construction company and its cement supplier may enter into a contract to build a mall. Both parties may have to issue bank guarantees to prove their financial bona fides and capability. In a case where the supplier fails to deliver cement within a specified time, the construction company would notify the bank, which then pays the company the amount specified in the bank guarantee.