A Bank Guarantee is a financial instrument issued by a bank on behalf of a customer (the applicant) to assure a third party (the beneficiary) of the customer's ability to meet a specific obligation.
In simple terms, it is a promise by the bank to pay a certain amount to the beneficiary if the customer fails to meet his contractual obligations.
How does it work?
- Application: The customer applies to the bank for a bank guarantee.
- Assessment: The bank evaluates the customer's financial position and creditworthiness.
- Issuance: If approved, the bank releases the guarantee in favour of the beneficiary.
- Obligation: The customer fulfills his obligation as per the contract.
- Guarantee Release: If the obligation is met, the bank releases the guarantee.
- Claim: If the customer defaults, the beneficiary can claim the guaranteed amount from the bank.
Types of Bank Guarantees:
- Performance Guarantee: Ensures the completion of the contract as per the agreed terms.
- Advance payment guarantee: Assures the return of an advance payment if the customer fails to deliver the goods or services.
- Bid bond guarantee: Guarantees that the bidder will enter into a contract if his bid is accepted.
- Payment guarantee: Assures payment for goods or services received.
Benefits of bank guarantee:
- Increased reliability: Provides assurance to the beneficiary.
- Facilitates business transactions: Helps secure contracts and deals.
