A Bank Guarantee (BG) is when a bank offers guarantees for different business obligations on behalf of their customers within certain regulations. The lending institutions provide a bank guarantee that can help customers recover for their losses in case of loan default. As such, a bank guarantee of a contract between the third party and the customer. As a guarantee of security for third-parties, bank guarantees boost entrepreneurship activities, promote business growth, and encourage an increasing number of people to take initiative into new and profitable ventures. By protecting customers from financial losses, customers have a lot of security in terms of their investments and ventures, and helping them purchase things that they otherwise could not.

When can a Bank Guarantee be used?

A Bank Guarantee is primarily used in the purchase and sale of goods, and can also be used on a credit basis. When companies make purchases from vendors, bank guarantees as a contractual obligation can serve as a liable protection in facilitating loan application processes and fostering business activities for greater growth. However, banks or financial institutions can only provide a bank guarantee to individuals/entities only after ensuring the financial and business stability of the company or individual applicant. Banks perform a thorough risk assessment on the risks involved with providing the Bank Guarantee to a particular individual or business, and then make appropriate decisions on the bank guarantee.

There are several advantages of a Bank Guarantee. To being with, a bank guarantee can help cover financial losses for the customer in times of need. Vendors or sellers have the opportunity of doing business transactions even on a credit basis through the help of a Bank Guarantee. As financial institutions charge low fees on bank guarantees, small-scale business find opportunistic platforms to increase the scale of their business and also focus on profits in the long run. Applying for a bank guarantee is very easy due to few documents required with a quick processing time once all relevant documents have been submitted timely and properly.

There are two types of Bank Guarantee that businesses can use-

Financial Guarantee: Financial guarantees are a kind of security deposit that banks or financial institutions offer to customers or buyers. The buyer then offers the financial guarantee to sellers instead of money deposits. As such, a financial guarantee acts as a protection for sellers against financial losses.

Performance Guarantee: Depending on the performance of a contractual obligation, a performance guarantee is issued when there is a default in performance, short performance and non-performance of the contract. In such cases, losses incurred by the beneficiary will be taken care of by the bank/financial institution.

Applying for a Bank Guarantee

Applying for a Bank Guarantee will require the business or individual to have a good credit score and strong credit history. Previous banking history such as CRISIL score, CIBIL ratings, creditworthiness (credit history), and liquidity of the applicant is analysed before providing a Bank Guarantee. Alongside applicant’s factors, the bank will also consider factors like the period/duration for which Bank Guarantee will be passed, BG value, beneficiary details, and the required currency to approve the applicant’s Bank Guarantee. In some cases, the beneficiary may need to provide some form of security to cover the Bank Guarantee value. After meeting these requirements, the bank/financial institution approves the applicant’s request for a Bank Guarantee.