What is a bank guarantee?
A bank guarantee is a promise provided by a bank that if a certain borrower fails to pay a loan, then the bank will take care of the losses. The bank will assure the original creditor through this bank guarantee 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.
Kinds of bank guarantee
- Deferred payment guarantee: When a buyer purchases capital goods or machinery, the seller will give credit to the buyer when the buyer’s bank gives a guarantee that it will pay the unsettled dues of the buyer to the seller. Under this type of guarantee, payment will be made in installments by the bank for failure in supplying raw materials, machinery, or equipment.
- Financial guarantee: Money will be repaid if the party does not complete a particular project or operation entirely. When there is a delay in the completion of the project, the bank will make the payment.
- Advance payment guarantee: If the seller fails to deliver the service or product accurately or promptly, the buyer will receive a refund of the payment.
- Foreign bank guarantee: A foreign bank guarantee is provided by a bank on behalf of a borrower. This will be offered on behalf of the foreign beneficiary or creditor.
- Performance guarantee: Compensation will be made by the bank when there is any delay in delivering the performance or operation. Payment will have to be made even if the service is delivered inadequately.
- Bid bond guarantee: The contractor of the project will guarantee that the best bidder or the highest bidder will have the capability and authority to implement a project as per his or her preferences. The bid bond will be given to the owner of the project as proof of guarantee and the bond will imply that the project will have to be devised according to the bid contract.
