Bank Guarantee
What is a Bank Guarantee?
A bank guarantee is a type of financial support provided by a credit institution. A bank guarantee means that the lender will ensure that the debtor’s obligations are met. In other words, if the debtor fails to pay the debt, the bank will cover it.
A bank guarantee allows the customer (or debtor) to obtain goods, purchase equipment, or withdraw a loan.
The main points:
- In the event of default by the borrower, the bank undertakes to settle the dues to the beneficiary
- Loan parties choose direct guarantees for international and cross-border transactions.
- The BG provides additional risk to the lender, so loans with such collateral will have higher costs or interest rates.
- A bank guarantee is a financial instrument in which a bank acts as guarantor of the obligations assumed by the borrower/applicant. In other words, the bank agrees to pay the amount in case the borrower is unable to meet the terms of the agreement.
Who can issue a bank guarantee? / Where can I get a bank guarantee?
All leading banks, non-bank finance companies (NBFCs), as well as credit institutions, are authorized to issue a bank guarantee.
Why there is a need for a bank guarantee in business?
The unavailability or scarcity of timely funds is a common phenomenon in companies,
There can be many, from deferred payments to slow growth. Furthermore, organizations are often unable to undertake new projects due to financial crisis and get caught in a vicious circle of cashflow management.
Fortunately, the situation can be greatly mitigated through the use of various financial instruments. A bank guarantee is one such arrangement that businesses can use to temporarily cover a lack of credit.
What are the functions of a Bank Guarantee(BG)
A bank guarantee performs two important functions:-
1.Provide an Immediate Credit Facility.
A bank guarantee plays a vital role in situations where an entrepreneur is unable to obtain sufficient funds to undertake a project and therefore seeks credit based on their previous finances. With the help of a bank guarantee, the entrepreneur can start the project without having to invest in advance and pay later once the funds arrive.
2.Close the Trust Gap.
Generally, it is difficult for a seller to trust a stranger who asks to buy the goods but pays the amount at a later date. This trust deficit is often the reason many trade deals fail. With a bank guarantee from a reliable lending institution, the seller can now safely close the deal. Even if the borrower does not make the payments on time, the bank takes the guarantee of the payment.
Process to get a Bank Guarantee
- The process of obtaining a bank guarantee is simple as all major banks and financial credit institutions provide this service. Also, you are more likely to receive a bank guarantee from a bank where you already have an account or conduct regular transactions of any kind.
- Although both companies and individuals can request and receive bank guarantees, it is common for companies to opt for them, since they always face situations in which said financial instruments are useful.
- To apply for a bank guarantee, you can physically approach the bank, talk to their representative about their requirements, or do it online if such a facility exists. They will then ask you to fill out a form where you will need to provide details such as the nature of the guarantee, the length of time and the conditions under which it can be invoked, etc. The length of time can be from three months to 10 years, while the conditions depend on the nature of the contract. We will talk about the different types of bank guarantees along with their respective terms and conditions later in this article.
- Your bank may ask you to provide collateral in exchange for the bank guarantee. In many cases, banks also issue guarantees based on your time deposits, mutual funds, shares, etc.
- How does a Bank Guarantee work?
- Once a bank guarantee is issued by the bank, it is sent to the seller, after which he proceeds to complete the transaction without any advance payment. The guarantee also defines the term within which the buyer must pay the seller. Once this is done, the bank guarantee becomes null and void.
- In case of non-payment by the buyer within the stipulated period, the seller invokes the bank guarantee and the bank is responsible for paying the seller.
Contact to know how you can get a bank guarantee to support your project.
Praveen| +971 52 842 9619 | Dubai-UAE
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