Bank Guarantee / Letter of Guarantee

At Credico Capital, we specialize in lending monetary assistance to businesses in the form of a Bank Guarantee. In layman’s terms, a Bank Guarantee (BG) or Letter of Guarantee (LG) is a banking instrument and financial guarantee of payment issued by a third party (bank) on behalf of the applicant, in the event of a payment default. Financial Bank Guarantee typically holds a maturity period of up to one year and are usually provided against services rendered rather than for material purchase.

Considered as one of the highest levels of investment-grade banking instruments, applicants typically procure Bank Guarantees for the sole purchase of securing or borrowing funds against the indenture. An entity that is collateralized by a Letter of Guarantee inspires the confidence of financial institutions and private investors. For more information about BG and other effective cash flow solutions, kindly contact a Credico Capital trade finance desk today.

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Bank Guarantee / Letter of Guarantee

How do bank guarantees work?

As mentioned, a Bank Guarantee is a promise made by a bank to cover the liabilities of their client if they fail to settle the debt. Such a banking instrument helps exporters and importers make purchases and conduct businesses without any financial restraints. BG's are primarily classified into direct and indirect bank guarantees. Direct bank guarantees are issued directly to the beneficiary and are used for both foreign and domestic business purposes. Indirect Bank Guarantees, on the other hand, are provided to only governmental institutions and public entities who are involved in the export business. Listed below are some of the principal benefits of bank guarantees:

  • A Bank Guarantee is a note of financial credibility, as a major bank is backing your business operations
  • A bank guarantee permits small and medium business enterprises to provide their suppliers with a credible reassurance that they’ll be able to meet their financial obligations
  • With it, you can ensure that the contractual obligations to a supplier or vendor are followed through
  • Bank guarantee usually has an expiry date, but open-ended guarantees which provide maximum flexibility are also available

Different types of bank guarantees

Trade Credit Guarantee

It helps to protect the provider of a goods/service from the risk of delayed or non-payment. These provide businesses with the necessary security to trade domestically and internationally.

Shipping Guarantee

A written guarantee that is provided to an importer which shows joint liability in case the goods are arriving before the shipping documents.

Advanced Payment Guarantee

Also termed as Advance Payment Bond, these ensure that the terms mentioned in a commercial contract are followed through.

Loan Guarantee

A financial institution such as a Bank shall assume the debt obligation of the buyer if they are unable to meet the make the required payment on time.

Performance Guarantee

Mostly used within the real estate industry, performance guarantee serves as collateral for the buyer’s investment if the contractor fails to meet the terms listed in the contract.

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