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More than just money, taking care of what's important - Bank Guarantee

A bank guarantee is a kind of guarantee from a lending institution that signifies that the lending institution ensures that the liabilities of a debtor are going to be met. In other words, if the debtor fails to perform the obligation, the bank will cover it. A bank guarantee allows the customer, or debtor, to acquire goods, purchase equipment or draw down a loan. A bank guarantee is a promise from a bank or other lending institution that if a particular borrower defaults, the bank will cover the loss

Key Features - Bank Guarantee

  • The 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.
  • As it provides additional risk to the lender, so loans comes with greater costs or higher interest rates.
The guarantee lets a company buys what it otherwise could not, thus helping business growth and promoting entrepreneurial activity.

Types of Bank Guarantee- Who's Helping You

There are various types of Bank Guarantees as follows and each is used for a specific type of transactions:
Performance Guarantee
To invoke a performance guarantee, the beneficiary requires to declare in writing that the seller did not fulfill his or her contractual obligations properly or on time. Performance guarantee is used as collateral in transactions involving a buyer and a seller.

Financial Guarantee
A financial guarantee is an undertaking from a bank to take responsibility for another company's financial obligation if that company does not meet its responsibility.

Advance Payment Guarantee
An advance payment guarantee is used to protect the advance payment made by a buyer to a seller. In case the seller fails to deliver goods or services as per the terms and conditions of a trade transaction, then the buyer can invoke the advance payment guarantee to recover a full or partial advance payment made to the seller.

Bid Bond Guarantee
Bid bonds are mainly to ensure that the winning bidder performs as per the tender terms after winning the tender. In case a winning bidder does not perform the tender requirements as stipulated, then the tender issuer can invoke the bank guarantee and fully or partially forfeiture the amount.

Deferred Payment Guarantee
Deferred payment guarantees are used when one party in a transaction undertakes to make payment of fixed amount at corresponding times in the future. In case, the debtor is unable to pay, then the deferred payment guarantee can be invoked to claim the amount.

Foreign Bank Guarantee
International trade uses a foreign bank guarantee. The bank issues a foreign bank guarantees for the benefit of a foreign beneficiary.

Process of Bank Guarantee
Applicant ask for a loan from a beneficiary or creditor
While applying for a loan both these two parties agree that a Bank Guarantee is necessary
Applicant requests the bank to provide a Bank Guarantee for the loan amount taken from the creditor. The bank guarantee will be taken on behalf of the creditor.
The Bank offers the Bank Guarantee to the applicant and send a financial instructions to an advising bank.
Difference between Bank Guarantee and Letter of Credit
Under a Bank Guarantee if the buyer is unable to make the payment to the seller or creditor, the bank pays the amount to seller.
Under a letter of Credit, the bank makes the payment to the seller once he delivers.
Bank guarantees are competitively priced and are usually valid for a long period. Moreover, bank guarantees are commonly accepted in almost all countries. Bank guarantees are available in Indian Rupee as well as currencies of other nations. Hence, they are very helpful for global transactions with parties in different foreign countries.

What are the documents that need to be submitted for Bank Guarantee?

  • Application form
  • Bank Guarantee text
  • Stamp paper (According to State Stamp Act)
  • In the case of a Private/Public Limited Company, the Board Resolution must be provided

What security must be provided to avail Bank Guarantee?
Bank Guarantee is provided against the collateral or 100% of the Fixed Deposit that is available. However, the previous year's performance is considered when the bank provides a Bank Guarantee



Key terms - Bank Guarantee
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