Importance Of Bank Guarantee In Your Business

 

Is your business importing raw materials from overseas?  You may not know how to make the foreign supplier trust you since he does not know you.

Similarly, when you sell your goods overseas you may not be knowing whether your buyer will pay promptly.  When the above risks are present even while buying and selling within your home country, one cannot imagine the volume of risk when the transaction is involving a third party who is located at a different part of the world.  Continue reading to know further on removing this risk.  The concept bank guarantee comes to your rescue in the above situations.  It is as simple as a crypto code.

Meaning of bank guarantee:  In simple words, by giving guarantee a bank promises that if the borrower fails to fulfill the contract terms, then the bank would pay the amount guaranteed.  In the above example, to make the foreign supplier trust and sell goods, you can produce a bank guarantee to him.  He knows the bank which also functions in his country and will trust the bank rather than directly trusting you.

Similarly, when selling goods, you can ask your buyer to give a guarantee from his banker.  Hence the primary aim of a bank guarantee is to reduce the credit risk involved.

Types:  There are various types of bank guarantees like a guarantee for payment, guarantee for payment return, tender guarantees and guarantees for warranty execution.  The types are based on the purpose for which these guarantees are issued.

Imagine a situation when your banker does not operate in your supplier/buyers’ country.  Even in such situations, banks have mutual tie-ups across the globe and you need not worry.  They will communicate with your supplier/buyers’ banker and get the job done.

Parties to a bank guarantee:  The person who asks his bank to give a guarantee is the applicant of bank guarantee.  The person who stands compensated if contract terms are not fulfilled is known as the beneficiary.   The bank which issues a guarantee is the issuing bank.

There are standard formats for the guarantee agreement.  The bank guarantee agreement should define the parties to contract, the amount of guarantee, period till which the guarantee is valid and the conditions of the guarantee.  If the beneficiary suffers losses due to reasons which are not covered in the bank guarantee agreement, then guarantee cannot be invoked.

Bank guarantee serves a good income-earning opportunity for the banker also as it is a non-funded method of lending.