A bank guarantee is a type of financial instrument offered by a lending institution. The bank guarantee means that the lender will ensure that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it. A bank guarantee enables the customer, or debtor, to acquire goods, buy equipment or draw down a loan.
A bank guarantee is an assurance that a bank provides to a contract between two external parties, a buyer and a seller, or in relation to the guarantee, an applicant and a beneficiary. The bank guarantee serves as a risk management tool for the beneficiary, as the bank assumes liability for completion of the contract should the buyer default on their debt or obligation.
Bank guarantees serve a key purpose for small businesses; the bank, through their due diligence of the applicant, provides credibility to them as a viable business partner for the beneficiary of the guarantee.
Bank guarantee has its own advantages for the business as:
- Bank guarantee reduces the financial risk involved in the business transaction.
- Due to low risk, it encourages the seller/beneficiaries to expand their business on a credit basis.
- When banks analyze and certify the financial stability of the business, its credibility increases and this, in turn, increase business opportunities.
- Mostly, the guarantee requires fewer documents and is processed quickly by the banks (if all the documents are submitted).
Types of Bank Guarantee
There are two major types of Bank guarantee used in businesses, which are as follows:
These guarantees are generally issued in lieu of security deposits. Some contracts may require a financial commitment from the buyer such as a security deposit. In such cases, instead of depositing the money, the buyer can provide the seller with a financial bank guarantee using which the seller can be compensated in case of any loss.
These guarantees are issued for the performance of a contract or an obligation. In case, there is a default in the performance, non-performance or short performance of a contract, the beneficiary’s loss will be made good by the bank. For example, A enters into a contract with B for completion of a certain project and the contract is supported by a bank guarantee. If A does not complete the project on time and does not compensate B for the loss, B can claim the loss from the bank with the bank guarantee provided.
CPBank intends to issue the guarantee as below purposes:
- Bid Guarantee: issued to secure any claim by the party inviting the Tender against the Tenderer in the event of withdrawal of the bid before its expiry date or if the bid is modified unilaterally or if the Tenderer, upon being awarded the contract, refuses to sign the contract or provide further guarantees on request.
- Performance Guarantee: issued to secure any claims by the buyer against the seller arising from the default of delivery or performance of the terms of the contract signed between the two parties (e.g. Construction, Goods Delivery, Assembly, execution etc.)
- Payment Guarantee: issued to secure any claim by the seller against the buyer for payment of the contract price by the agreed date.
- Advance Payment Guarantee: issued to secure any claims by the buyer against the seller for reimbursement of the buyer’s advance payment on the contract price before delivery of the goods
(or advance payment of the full price) in the event that the seller has failed to fulfill this or her contractual obligations in full.
- Retention Money Guarantee: issued to secure any claim by the buyer against the seller due to possible defects that arise following delivery