Bank Guarantee

A Bank Guarantee is a promise made by the bank to meet the liabilities of a debtor in case an individual doesn’t meet the contractual obligations of the beneficiary and the applicant. The beneficiary looks up to the guarantee for payment.

Bank Guarantee is a useful financial instrument that enables companies to grow their existing business by making a bid on transactions. There are various instruments it can be used which include a bid bond, a performance bond, advanced payment guarantee, a warranty bond, a letter of indemnity, a payment guarantee, a rental guarantee, or a confirmed payment order.

There are two types of bank guarantees:

Direct guarantee – A Direct Guarantee is a guarantee that a bank offers in favour of the beneficiary. The account holder asks the bank to do so.
Indirect guarantee – An indirect guarantee, as the name suggests is a guarantee that is not directly issued by the bank, however, a second bank provides the guarantee in place of an already issued guarantee. In a case where the second bank faces losses when a claim is done against the guarantee, then the original bank that provided the guarantee compensates the losses.
Performance Bond or Contract Bond: – This type of bond is commonly used in the real estate industry that provides an assurance that a contractor will complete the project assigned to him.
Bid Bond: – A Bid Bond is most commonly issued for bidders that are dealing in the construction based projects.
Warranty Bond: – The Warranty Bond denotes that all the defects that are found in a specific project will be taken care off in the period of warranty.
Advance Payment Bond: – An Advance Payment Bond is an agreement where an issuer takes the full responsibility for returning an advanced payment to the buyer in case the seller doesn’t pay.
Payment Guarantee: – A Payment Guarantee provides the supplier financial security in case the applicant doesn’t pay in time for the goods or services which are supplied.