Key Things to Know About A Bank Guarantee

February 27, 2020

A BG bank guarantee is a promise made by a bank or lending institution to a third party, stating that they would take on the payment responsibility of their client, should the client fail to settle his debt. This provides security for the third party involved.

This guarantee is an agreement between 3 parties - the applicant, the beneficiary, and the bank/lending institution. The applicant requests a bank guarantee from the bank, on behalf of the beneficiary. It makes business transactions easier and less risky.

Eligibility

As is the case for most loans and other financial services, you need to have a good financial record to be eligible to apply for a bank guarantee. The bank will go over your banking history, creditworthiness, and other parameters to determine whether or not you can be trusted. Once you've met all the bank's requirements, they'll start processing your BG.

Both Parties Need to Be in Agreement

Before the applicant requests for Bank Guarantee from a bank, both parties (debtor and creditor) will need to agree that a bank guarantee is necessary. If the loan amount in question isn't a lot, or perhaps both parties have had business before and trust each other, they may decide not to get a bank guarantee. However, if they agree on getting a bank guarantee, the applicant can then request for one which will be taken on behalf of the creditor.

Certifies the Credibility of The Applicant

The financial history of bank guarantee applicants is thoroughly checked. There is no room for error. Hence, it is safe to say that anyone who's been approved for a bank guarantee, is credible and can be trusted with loans. If you have a BG, you can partner with large firms and companies and expand your business.

Collateral Might Be Needed

For high-value transactions, you might need to present the bank with collateral security before they process and issue the bank guarantee. This is because, the larger the amount, the higher the risk involved. The bank needs to know they'd be able to make their money back.

Types of Bank Guarantee

There are six types of Bank Guarantee; Performance Guarantee, Deferred Payment Guarantee, Financial Guarantee, Foreign Bank Guarantee, Advance Payment Guarantee, and Bid Bond Guarantee. The most common types are the performance guarantee (which deals with how well and fast the applicant gets his job done) and the financial guarantee (which guarantees the creditor that the money will be repaid if the second party fails to complete the project). Source for a reliable provider who will provide you a bank guarantee if required.