Bank Guarantee
Bank guarantees are an additional obligation to banks than credit letters do. A bank guarantee, similar to the letter of credit provides a specific amount to the beneficiary. The bank will only pay the amount when the opposing party fails to meet the terms of the contract. The guarantee is used to protect buyers and sellers from damages or losses resulting from failure to perform by the other side in an agreement.
Bank guarantees protect contract parties from credit risk. For instance, in a construction contract, both the firm and cement provider might need guarantees to show financial stability. If the provider fails to deliver on time, the bank pays the specified amount, ensuring contract fulfillment and financial security.
Types of Bank Guarantees
Bank guarantees are similar to any other financial instrument. They can come in many different types. For example, direct guarantees can be offered by banks for both foreign and domestic businesses. Direct guarantees are usually issued when the person who is the recipient of the security is an agency of the government or other public institution.
The most commonly used types of guarantees are:
- Guarantees for shipping: This type of warranty is provided to the transporter in the event that a shipment arrives before the documents are even received.
- The institution that offers the loan guarantee promises to fulfill the financial obligations if the borrower fails to pay.
- Advance payments guarantees kind of guarantee serves to ensure the contract’s fulfillment. It is a kind of collateral that will reimburse an any advance payment if the seller does is unable to provide the goods or services that are specified by the terms of the agreement.
- Confirmed payments guarantee: Under this irrevocable contract an amount of money is transferred by the bank to the beneficiary on behalf the customer by a specified date.