Bank guarantees
A bank guarantee is a type of financial backstop offered by a lending institution.
Bank guarantees
A bank guarantee is a type of financial backstop offered by a lending institution. The bank guarantee means that the lender will ensure 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.
Key takeaways
- A bank guarantee is when a lending institution promises to cover a loss if a borrower defaults on a loan.
- Parties to a loan choose direct guarantees for international and cross-border transactions.
- The guarantee provides additional risk to the lender, so loans with such a guarantee will come with greater costs or interest rates.
A Bank Guarantee (BG) is very similar to a Letter Of Credit (LC) as they both are used for many types of business transactions (financial or performance based). The real difference between the two is that a Letter Of Credit (LC) ensures that a business transaction goes as planned, whereas a Bank Guarantee (BG) reduces losses if a business transaction doesn’t go as planned. A Bank Guarantee (BG) guarantees a certain sum to the beneficiary if the opposing party doesn’t fulfill its specific obligations under their agreed upon contract. Bank Guarantees (BG) ensure both sides in a contractual agreement from credit risk. A construction company and its steel beam supplier may enter into a contractual agreement to build a new complex. Both sides might have to issue Bank Guarantees (BG) in order to prove their credit-worthiness to each other.
In a case that the steel beam supplier fails to deliver steel beams to the job site per their agreed contractual agreement, the construction company would notify the issuing bank of the breach of terms agreed up in the Bank Guarantee (BG) and the bank would then pay the construction company the amount agreed upon in the Bank Guarantee (BG).
How does the bank guarantee (BG) process work?
Bank guarantee closing process
Fill out and return the Bank Guarantee (BG) application with the documents for your deal. (Contract, Agreement, etc.)
A SWIFT MT760 draft of the Bank Guarantee (BG) will be created for you and your beneficiary to review.
a)Finalize the draft between you and your beneficiary and sign off on the draft (changes are free of cost).
b)We issue you a payment invoice for the BG, which you arrange to pay.
c) Once we receive your wire payment, we will release the finalized Bank Guarantee (BG) to the bank for issuance and delivery.
More often than not, the bank will issue the Bank Guarantee (BG) within 48 hours of release.
Once issued, a copy of the BG will be emailed to you as it is transmitted by a MT760 SWIFT message to the beneficiary, including the reference number of the BG.
Your seller’s bank will be able to receive and confirm the Bank Guarantee (BG) transmission soon thereafter.
What are types of bank guarantees?(BG)
1. Bid Bond Guarantee
2. Bid Bond Guarantee
3. Advance Payment Guarantee:
4. Warranty Bond Guarantee
5. Payment Guarantee:
6. Rental Guarantee:
7. Letter of Indemnity:
8. Confirmed Payment Order Guarantee:
1. Bid Bond Guarantee
Is issued as part of the bidding process between a contractor and the project owner, in order to guarantee that the winning bidder will undertake the contract under the term sand conditions that they bid.
2. Bid Bond Guarantee
A surety bond usually issued by a bank to guarantee the satisfactory completion of a project by a contractor.
Also known as a contract bond.
3. Advance Payment Guarantee:
Is utilized whenever a contract includes advance payment to be made to the seller.
It guarantees that this advance payment will be returned to the buyer if the seller happens to not fulfill its obligation to the seller.
4. Warranty Bond Guarantee
A type of security bond that states that the contractor has a history of trustworthiness.
It also protects the client should the work completed be subpar or unethical in any way.
5. Payment Guarantee:
A financial commitment that requires a debtor to make a repayment due to terms outlined in the debt agreement.
6. Rental Guarantee:
A type of insurance used to protect landlords against loss of rent.
7. Letter of Indemnity:
A letter that guarantees certain contractual provisions will be met or financial reparations will be made.
Guarantees that losses will not be suffered if the contractual provisions aren’t met.
8. Confirmed Payment Order Guarantee:
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. At Amspex Global LTD we apply performance bond as collateral for the buyer’s costs incurred if services or goods are not provided as agreed in the contract.
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