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Bank Guarantee (BG)

Bank Guarantee (BG)- Sometimes business need to guarantee payments and the best way to do so is to provide a bank guarantee which ensures the creditor that payment will be made once the transaction is complete.

It is a type of warranty that a bank provides individual to provide loan, payment or services to start business activity.

A bank guarantee is promise /surety that is provided by a financial institutions that if a particular borrower defaults on a loan, the bank will cover the loss by paying off the debt and liabilities incurred by the individual or business entity in case they are unable to pay.

Please note that the bank guarantee is not the same as a letter of credit.

Who can get a Bank Guarantee (BG)?

Anyone can get a Bank Guarantee as afar as all criteria are met.

By providing a Bank Guarantee, a bank offers to honor any payment to the creditors upon receiving a request. This requires that the financial institution be very sure of the business or the individual to whom the bank guarantee is being issued. So banks run risk assessments to ensure that the guaranteed sum can be retrieved back from the business. This may require one to present something in the shape of cash or capital assets.

Any individual/organization that can pass the risk assessment and provide security may obtain a bank guarantee.

How do Bank Guarantees Work

The system for providing bank guarantees works like this

  1. The applicant and the creditor ascertain that there is a need for a bank guarantee.
  2. The applicant reaches out to a financial institution to issue a bank guarantee to the creditor.
  3. The bank runs a risk assessment and asks for security.
  4. The applicant provides the security and the bank or financial institution processes the bank guarantee.
  5. The bank guarantee is sent to the creditors bank or to the creditor or the applicant may be asked to collect it in person to give to the creditor.

Benefits of a Bank Guarantee

  1. A Bank Guarantee enables companies to make purchases that they would otherwise not be able to make, this guarantees thus serves to heighten business activity and expand enterprenural activity.
  2. All the money is not tied up in one project but can be spread around into other projects.
  3. There is cash available to explore and expand business.

Categories Of Bank Guarantees.

There are two categories of bank guarantees in general

  1. Direct Bank Guarantee: this is a guarantee which is issued by the bank of the account holder directly in form of the beneficiary.
  2. Indirect Guarantee is a guarantee which is issued by a second bank in return for a counter guarantee.

A financial institution can provide many different types of bank guarantees

  1. Performance Guarantee/ Performance Bond: These are bonds that act as collateral for any loss suffered by the buyer in case the performance of the seller is below par.
  2. Advance Payment Guarantee: This is to ensure the safety of any advance payment made by the buyers to the sellers. In case the seller is unable to deliver the service or the goods, then the buyer can get his money back.
  3. Payment Guarantee: This guarantee is provided to the seller, ensuring payment by a predetermined date.
  4. Conditional Payment Undertaking: This is an instruction to the bank from an account holder to pay a sum of money to a creditor on completion of certain conditions. This bond is a post contract instrument that is used to pay off agents and contractors on completion of a project
  5. Guarantee Securing Credit line: This surety is given to a creditor on claims against the debtor in case a loan is not repaid as per the terms of the agreement.

Order and Counter Guarantee: This is a surety given by the debtor to the creditor, to protect against the failure to fulfil an obligation as contracted. In case of default, the creditor can demand the payment back.

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