Also referred to as bank bond, bank guarantee is a guarantee offered by a lending institution certifying that a debtor’s liabilities will be met. In short, when the debtor fails to settle a debt, the bank will be obliged to cover it. A bank guarantee allows debtor or customer to do a lot of things without having to worry about a shortage of investment such as buying new equipment, acquiring goods, drawing down loans or undertake various activities that help expand business activities.
It can also be deemed as an undertaking by a bank for covering transaction risks or a debt. Sometimes, bank guarantee can also be used as an alternative to any corporation offering security for a debt itself. Here, banks usually demand some type of quasi-security or require in return such as
- A counter-indemnity
- Cash collateral
- Security over the assets of an organization
Obtaining a Bank Guarantee – How does a Company Obtain One
A bank guarantee is actually a promise offered by a commercial bank. According to this agreement, all liabilities of a specific debtor will be met under a condition when obligations stated in the contract are not met. In this case, the commercial bank offers to stand as the guarantor. For a transaction, the bank serves as a guarantor on behalf of the business customer. Most of the bank guarantees are available with a fee. This fee is equivalent to a small fraction amount of the entire contract. It is usually calculated somewhere between 0.5 per cent and 1.5 per cent of the entire guaranteed amount.
How to Apply for a Bank Guarantee
Most people are under a notion that bank guarantees are restricted to only business customers. However, this is not true. These guarantees not just limited to business customers. It is possible for individuals to applying for one. However, businesses are known to receive a huge majority of guarantees. When it comes to obtaining one, bank guarantees are not a hard nut to crack. In fact, these are easy to obtain.
In order to request a bank guarantee, one needs to get in touch with a bank (as an account holder) and fill out an application. This application will identify the amount of guarantee and explanations on applying for one. Usually, applications require a stipulated period of time for which it will be considered valid. This also defines some special conditions for payment and details related to the beneficiary.
In some cases, the bank demands collateral too. The collateral may be in the form of a promise agreement for assets, for example cash accounts, bonds, stocks, etc. Generally, illiquid assets are not accepted by banks as collateral.
Why Get a Bank Guarantee for Sale?
Varied types of bank guarantees exist, including:
- Performance guarantees
- Deferred payment guarantees
- Bid bond guarantees
- Advance payment guarantees
- Financial guarantees
- Many others
These guarantees usually serve as an integral part of the arrangements between a large corporation and a small firm (private or public). Here, the larger corporation aims at gaining ample protection against risks of counterparty. Hence, it requires that smaller party receives a bank guarantee in advance (prior to the starting of work/project).