TYPES OF BANK GUARANTEE

 TYPES OF BANK GUARANTEE

 

What is a Bank Guarantee?

A bank guarantee is a commitment made by a bank or other financial institution that if a particular borrower defaults on a loan, the bank or financial institution would cover the losses. Through this bank guarantee, the bank will promise the original creditor that if the borrower fails to satisfy his or her obligations, the bank will take care of them.

How many parties involve in Bank Guarantee?/ LG parties 

Usually 3 (three) minimum parities involved in any types of Bank Guarantee. First one is an Applicant and second one is the beneficiary and third is everyone knows the BANK.

 

Parties involve any types of Bank Guarantee	particulars
Applicant	The party that requests a bank guarantee from the bank and borrows from a beneficiary.
Beneficiary	The party that receives a types of Bank guarantee.
The Bank	The party that agrees to sign and assures payment in case the applicant fails to repay the loan or default any contract as per Bank Guarantee.

 

 Important of Bank Guarantee?

• Types of Bank guarantees are very often required in business. To mitigate the business risk of nonpayment of funds.
• Ensure the continuity of business without disturbance. In case of nonpayment or default, beneficiary has the right to claim the types of Bank Guarantee and continue the business.
• Minimize the risk for each business parties
• Fulfill the contact obligations under loan/contract agreement
• Reduce the financial risk of business transaction in types of Bank guarantee.

 

Bank Guarantee process/ How can I get a Bank Guarantee? / LG Process

• Contract between seller and buyer and identified required Bank guarantee
• Contact the Bank
• Fill out the LG application
• Specified the value of Guarantee
• Contract reference numbers are most important
• Specified the purpose of guarantee
• Name and address of the party
• Validity dates are also very important
• Additional conditions if any

 

What are the types of Bank Guarantee? / List of Bank guarantees

There are various types of Banks guarantees as per below list and all are used in various types of assurances.

1. Performance Guarantees
2. Financial Guarantees
3. Bid Bond Guarantees’
4. Advance payment Guarantees
5. Foreign Bank Guarantees
6. Differed payment guarantees
7. Warrantee guarantees
8. Retention guarantees
9. Personal guarantees
10. Shipping Guarantee

 

 Performance guarantee:

Types of Guarantees provides to performing/ delivering some goods or services and under this performance guarantee, compensation will be made by the bank when there is any delay/default in delivering the performance or operation. Payment will have to be made even if the service is delivered insufficiently as described in the contract as well as the performance Bank Guarantee advice.

 

Financial guarantee:

A financial guarantee is a type of Bank Guarantee that states if a borrower defaults, another party (Bank or the Financial Institution) will repay the lender. In essence, a guarantor is a third party who agrees to assume responsibility for a loan if the borrower fails to make timely payments to the Beneficiary. This can be considered as security deposit for the payment I default.

 

Financial guarantees act like insurance policies, guaranteeing a form of debt will be paid if the borrower defaults.

Guarantees can be financial contracts, where a guarantor agrees to assume financial responsibility if the debtor defaults.

Other guarantees involve security deposits or collateral that can be liquidated if the debtor stops paying for any reason.

Guarantees may be issued by banks and insurance companies.

Financial guarantees can result in a higher credit rating for the lender and better interest rates for the borrower.

 

Bid bond guarantee:

The type of Bank guarantee, in simple language “to provide a guarantee/assurance to the beneficiary/owner that the bidder will execute the job/work if selected in the bidding/tender.”

In other words, to provide a guarantee that a winning bidder will take up the contract/project as per the terms at which they bid.

This types of guarantees usually common in construction industry.

Bid bond guarantee is also called as Tender Bond Guarantee.

The contractor of the project will guarantee that the selected bidder will have the capability and authority to implement a project as per the requirements.  

And, bid bond will be given to the owner of the project as a proof of assurance and the bond will indicate that the contract will have to be devised according to the bid contract value.

 

What is the difference between Bid Bond and Performance Bond/ Bid Bond vs Performance Bond?

Bid Bond guarantee	Performance Bond guarantee
Required before awarding the contract.	Required after wining the bid and to perform the contact.
Bid bond help to select the right contractor	Performance bond will ensure the project is completed accurately.
Use at the tender stage	Use at the ongoing stage.
Usually, a 10% value.	Not specified.

 

Advance payment guarantee (APG)

This is the type of Bank guarantee use to cover the advance payment made to certain project/ contract for the supply of goods and or services. Usually in the construction industry, advance payment is required to execute the project or before supply of goods and service. To cover the risk of advance payment buyer usually request for advance payment bank guarantee. If the seller fails to deliver the service or product accurately or promptly, the buyer has right to claim the guarantee in such case.

 

Foreign bank guarantee:

This is the type of Bank guarantee for foreign bank guarantee is provided by a bank on behalf of a debtor. Foreign Bank guarantee will be issued on behalf of a borrower, and this will be offered on behalf of the foreign beneficiary or creditor.

 

Deferred payment guarantee (DPG)

The types of Bank guarantees of “Differed payment guarantee” refers to a bank guarantee or a payment guarantee that is offered to the exporter for a deferred period.

 When a buyer purchases goods or services, the seller negotiate for credit to the buyer when the buyer’s bank issues 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 (differed) by the bank for the delivery failure of goods and or services.

When comparing with all other types of Bank Guarantees, differed payment guarantee refers the payment will have to be made by the bank on the accepted due dates and thereafter the installment is recovered from the borrower on whose behalf guarantee is issued.