What is the meaning of a bank guarantee? At present, this small request helps thousands of people worldwide to get money to fulfill their dreams about private business, new equipment, and cover all necessary issues. How does it work? Read the article to find the answers!
Nowadays many people face a situation when they want to start a business, buy new techniques, invest in the development of their future perspectives or use rental service facilities. The problem is that big desires often require extra money and evidence of solvency. Moreover, what to do if you have no six-digit bank accounts or wealthy relatives who can help? Where can you go and ask for help?
In this article, you will find out the answer to the question “What is a bank guarantee” and get acquainted with the fundamental principles of its work.
Bank guarantee definition
First of all, let’s define the meaning of a guarantee obtained from the financial organization.
According to merriam-webster.com, it is a kind of guarantee, provided by an importer’s depository financial institution, which guarantees the payment of the required sum to the exporter.
In other words, it is a specific promise of one banking company to pay to another financial concern, company or organization for the third party in case if it fails to comply with its obligations indicated in a particular contract.
The side which provides guarantees is called a guarantor. The party which asks for a bank guarantee letter is called the principal. Finally, the bank which receives the warrant is named the beneficiary.
Before the principal obtains the bank guarantee, he has to pay for it to the institution that provides fiscal support.
Generally, one defines nine bank guarantee types:
- bid bond;
- advance payment;
- warranty bond/obligation;
- a foreign financial institution;
- fiscal guarantees;
- payment or loan warranty;
- deferred payment;
People often use such guarantees in infrastructure projects and real estate contracts.
How does bank guarantee work?
How does this financial “insurance” work? – You will probably ask. Let’s try to discover!
- A bank guarantee is a serious issue. It is an empirical confirmation that a debtor/client has enough money to perform the indicated duties before the beneficiary (like participation in tenders).
- However, if a client fails to make necessary payments within a specified time frame defined by the contract, the guarantor enters “the game” and pays upon the bills to the beneficiary.
- Thus, as you see, the bank guarantee letter is a specific tool that improves the relationship between the sides of interaction: the principal obtains the desired product credit (deferral of payment), the beneficiary stays sure that his client/debtor will pay all the obligations, and the warrantor receives specific charges for its service. Moreover, if there is any misunderstanding, the aggrieved side can always enforce its legal rights even when its company is across the ocean.
- Furthermore, all the risks related to financial transactions reduce to a minimum.
Do you still question yourself “Are bank guarantees real? How do they work on practice?” Then, take a glance at the example to see how easy the procedure is!
How does a bank guarantee work example
Let’s imagine for a while that you are the owner of a small bakery. The previous year God has blessed you well enough to expand the production. At present, you have a desire to purchase contemporary equipment and more professional appliances for N360.6 million.
To feel more confident that you will pay for all the techniques, the salesman may ask you to provide a warranty from the financial organization. How can you get it? The procedure is not as complicated as it may seem at first sight.
If you have a cash account in a particular banking company (guarantor), you can request for a guarantee letter there. If you have no checking accounts at all – the choice is diverse: you can visit any depositary financial institution you think to be reliable. The guarantor will provide the document in writing in two copies: the first one is for you, while the second copy is for a vendor. The guarantor becomes a co-signer of a trade between the salesman and you.
As you see, business transactions can’t be built on trust alone, especially if you want to purchase goods from overseas. You always have to possess specific insurance that things will go correctly. Bank guarantee is the exact thing you need!