Bank Guarantee

What is it

There are a few different types of Bank Guarantee

  • Advanced Payment Guarantee – typically ensures the performance of a commercial contract.
  • Loan Guarantee – promises to assume the debt obligation of the borrower if they face default.
  • Performance Guarantee – ensures the full and due performance of the contract in line with the original contract.
  • Deferred Payment Guarantee – this is a promise for a payment which has been postponed.
  • Shipping Guarantee – a written guarantee which shows joint liability. Furthermore, it will be presented by the importer to the carrier in the event of goods arriving before the documents.
  • Trade Credit Guarantee – This covers the providers of a good/ service against the risk of non (or late) payment.

Although not exhaustive this offers a picture of the type and use of each product. It is. To access a Guarantee, applicants must demonstrate creditworthiness to their bank. The bank would normally look at previous trading history, recent accounts, credit history, and liquidity. The bank would need to know how long the bank guarantee is required, the amount, currency, and beneficiary details. This is generally speaking of course; different guarantees will require different documentation. Moreover, a bank might ask for some security over the guarantee (e.g. liquid assets such as property or equipment it holds, and maybe a personal or directors guarantee).

Bank Guarantee uses

To use an example Company A is a small, unknown construction company that would like to purchase 3 million pounds of products. The product vendor may require Company A to provide a bank guarantee in order to feel more confident that it will receive payment for the equipment it ships to Company A.

To obtain this bank guarantee, Company A requests one from its preferred lender. The lender provides the guarantee in writing, which is then passed on to Company A and its vendor. Company A’s lender essentially becomes a co-signer on the purchase contract with the vendor.

Bank Guarantee v Letter of Credit

It is important to note that a bank guarantee is not the same as a letter of credit, although with both instruments the issuing bank accepts a customer’s liability if the customer defaults. With a guarantee, the seller’s claim goes first to the buyer, and if the buyer defaults, then the claim goes to the bank. With letters of credit, the seller’s claim goes first to the bank, not the buyer. Although the seller will likely get paid in both cases, letters of credit offer more assurance to sellers than guarantees generally do.

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