Bank Guarantee Definition
A bank guarantee is a type of guarantee from a SBLC providers or lending institution. The bank guarantee means a lending institution ensures that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it. A bank guarantee enables the customer, or debtor, to acquire goods, buy equipment or draw down a loan. Bank Guarantee is an agreement between 3 parties viz. the bank, the beneficiary, and the applicant. The beneficiary is the one to who takes the guarantee. And the applicant is the party who seeks the bank guarantee from the bank. Bank Guarantee are an important banking arrangement and play a vital role in promoting international and domestic trade.
The bank issues Bank Guarantee on the receipt of the request from the applicant. This receipt is of the “guarantee amount” towards some purpose / underlying transaction towards the “beneficiary”. If the bank i.e. “the guarantor” receives the “claim” from the beneficiary, it results in “Bank Guarantee invocation”. In the case of foreign Bank Guarantee, apart from these 3 parties, there is also a “correspondent bank”. If a bank does not have a branch in some foreign country, it issues Bank Guarantee in that country through its “correspondent bank”. The bank does all the required due diligence, financial and business analysis before issuing the guarantee.
What You Need To Know About Bank Guarantee
A bank guarantee is when a lending institution promises to cover a loss if a borrower defaults on a loan. The guarantee lets a company buy what it otherwise could not, helping business growth and promoting entrepreneurial activity.
There are different kinds of bank guarantees, including direct and indirect guarantees. Banks typically use direct guarantees in foreign or domestic business, issued directly to the beneficiary. Direct guarantees apply when the bank’s security does not rely on the existence, validity and enforce ability of the main obligation. Individuals often choose direct guarantees for international and cross-border transactions, which can be more easily adapted to foreign legal systems and practices since they don’t have form requirements.
Instance of Bank Guarantees
Due to the general nature of a bank guarantee there are many kinds. Here are some things you need to know:
- A credit security bond serves as collateral for repaying a loan.
- A payment guarantee assures a seller the purchase price is paid on a set date.
- A confirmed payment order is an irrevocable obligation where the bank pays the beneficiary a set amount on a given date on the client’s behalf.
- A warranty bond serves as collateral ensuring ordered goods are delivered as agreed.
- An advance payment guarantee acts as collateral for reimbursing advance payment from the buyer if the seller does not supply the specified goods per the contract.
- A performance bond serves as collateral for the buyer’s costs incurred if services or goods are not provided as agreed in the contract.
- A rental guarantee serves as collateral for rental agreement payments.
Requesting for a 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 guarantee, the Issuer contacts the bank and fills out an application 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 can be in the form of a pledge agreement for assets, such as stocks, bonds or cash accounts. Liquid assets are generally not acceptable as collateral.