A Bank guarantee is also known as an act of promise made by banks or financial institutions on behalf of the beneficiaries, if the borrower fails to pay a loan within the mentioned period, then the bank or financial institutions will take care of the loss. This means the bank takes the responsibility to pay off the loss if the borrower does not meet his or her liabilities.
Bank guarantees are widely used by business entities, with the aid of bank guarantees the debtor or borrower would be able to purchase machinery, raw materials, equipment and commercial purposes.
When a bank signs a bank guarantee, it agrees to pay the amount requested by the borrower. Therefore, assuring guarantee carry a high risk for banks.
Step 1- Firstly, the applicant must compare the rates offered by different lenders, you can also visit financeseva to check all details in one place. Once chosen, an applicant should request a loan application from their preferred creditor.
Step 2-The bank will go through the information on BG period, value, beneficiary details and other currency required for loan approval. In case the bank is not satisfied with the given details they will require security to cover BG value.
Step 3- Once the banks get satisfied with all the requirements, then bank officer will provide the necessary approvals that are required for the Bank guarantee process.
Advantages of Bank Guarantees
Financial Guarantee – A financial guarantee also refers to payment guarantees that assure payment will be repaid if the party fails to complete the project and if it seems that completion of a project is being delayed.
Performance Guarantee – It is known as contractor promise to complete the project that is undertaken, the money will be paid by the bank if there is any delay in delivering operations.
Differed Payment Guarantee – This guarantee is offered to an exporter for a certain period, payment will be made in installments by the buyer on the failure of supplying goods.
Bid Bond Guarantee – This guarantee is usually taken by a contractor for the owner of the infrastructure or industrial types of projects. It ensures compensation to the bond owner if the bidder fails to begin the project.
Foreign Bank Guarantee - Under a foreign bank guarantee, a promise made by the bank on behalf of the borrower, will be offered on behalf of the foreign beneficiary.
Most of you get confused between bank guarantee and letter of credit, it may be similar in the process but there are still certain differences that shall need to be understood.
|Bank Guarantee||Letter of Credit|
|Bank assures or guarantees refers to act or promise made by bank.||Letter of credit refers to financial documents for assured payment.|
|BG made to the beneficiary on behalf of applicant. e.g if the applicant fails to make payment, a loss will be covered by the bank.||LC made by a bank, Undertaking of buyer's bank to make payment against the seller.|
|It involves a higher risk for banks and lesser for applicants.||It carries less risk for banks and higher for applicants.|
|Payment can be made even on non-fulfillment of obligation.||Payment can be made only after the completion of specified performance.|
|Bank guarantees Issued by government contracts.||Letter of Credit often availed by a business engaged in export & import.|
|BG involves only 3 parties in transactions.||LC involves 5 or more parties in transactions.|
Bank guarantees are often preferred by beneficiaries as its helpful for global transactions, compared to a letter of credit there are several points where BG stands out for its special features like lower fees, longer tenure and being widely accepted by all countries. However, depending on requirements that match your profile are considered to be the best financing option.
Also Read:- Top 5 Startup Business Loan Schemes by Indian Government