Bank Guarantee: Meaning, Types, Uses,
Advantages, Charges, Difference & Process.
TABLE OF
CONTENTS
1. What
is the Meaning of Bank Guarantee?
2. What are the Types of Bank Guarantee?
3. What are the Uses of Bank Guarantee?
4. What are the Advantages and Disadvantages of Bank Guarantees?
5. What are the Costs and Charges of Bank Guarantee?
6. What are the major Difference between BG & Letter of Credit (LOC)?
7. What is the process to obtain or acquire a bank Guarantee (BG)?
2. What are the Types of Bank Guarantee?
3. What are the Uses of Bank Guarantee?
4. What are the Advantages and Disadvantages of Bank Guarantees?
5. What are the Costs and Charges of Bank Guarantee?
6. What are the major Difference between BG & Letter of Credit (LOC)?
7. What is the process to obtain or acquire a bank Guarantee (BG)?
1. What is
the Meaning of Bank Guarantee?
A bank
guarantee is a promise from a bank or a financial institution that if a
particular borrower defaults on a loan, the bank will cover the loss.
The bank
guarantee signifies a lending institution ensures that the liabilities of a
debtor is going to be met. In other words, if the debtor is unsuccessful to
settle a debt, the bank will cover it. A bank guarantee allows the customer, or
debtor, to acquire goods, purchase equipment or draw down a loan.
A bank
guarantee acts similarly to a line of credit, except that a line of credit can
be drawn upon at will by the bank's client. A bank guarantee is used only if
the client does not pay its vendor an agreed-upon amount. U.S. credit
institutions are forbidden from assuming guarantee obligations, and therefore
most international transactions require a standby letter of credit.
2. Types and Examples of Bank Guarantees
There are
many different kinds of Bank Guarantee namely:
- A Payment Guarantee assures a seller the purchase price is paid on a set date.
- An Advance Payment Guarantee acts as collateral for reimbursing advance payment from the buyer if the seller does not supply the specified goods per the contract.
- A Performance Bond serves as collateral for the buyer’s costs incurred if services or goods are not provided as agreed in the contract.
- A credit security bond serves as collateral for repaying a loan.
For
example, St. Marys hospital is a new hospital that wants to buy $1 million in
medical equipment. The equipment vendor requires St. Marys hospital to provide
a bank guarantee to cover payments before they ship the equipment to St. Marys
hospital. St. Marys hospital requests a guarantee from the lending institution
such as Kingrise Finance Limited ( kingrisefinance.com )
keeping its cash accounts. Kingrise Finance Limited essentially cosigns
the purchase contract with the vendor.
KEY
TAKEAWAYS
- A bank guarantee is when a lending institution promises to cover a loss if a borrower defaults on a loan, of which there are many examples.
- Individuals often choose direct guarantees for international and cross-border transactions.
- A bank guarantee enables the customer, or debtor, to acquire goods, buy equipment or draw down a loan.
3. What are the Uses
of Bank Guarantee?
- When large companies purchases from small vendors, they generally require the vendors to provide guarantee certificate from banks before providing such business opportunities.
- Predominantly used in the purchase and sale of goods on credit basis, where the seller is assured of payment from the bank in case of default by the buyer.
- Helps in certifying the credibility of individuals, which in turn, enables them in obtaining loans and also assists in business activities.
Though there are lots of uses from a
bank guarantee for the applicant, the bank should process the same only after
ensuring the financial stability of the applicant/business. The risk involved
in providing such a guarantee must be analysed thoroughly by the bank
4. What are the
Advantages and Disadvantages of Bank Guarantees?
Bank guarantee has its own advantages and disadvantages. The
advantages are:
§ Bank guarantee
reduces the financial risk involved in the business transaction.
§ Due to low risk, it
encourages the seller/beneficiaries to expand their business on a credit basis.
§ Banks generally
charge low fees for guarantees, which is beneficial to even small-scale
business.
§ When banks analyse
and certify the financial stability of the business, its credibility increases
and this, in turn, increase business opportunities.
§ Mostly, the
guarantee requires fewer documents and is processed quickly by the banks (if
all the documents are submitted).
On the flip side, there are some disadvantages such as:
§ Sometimes, the
banks are so rigid in assessing the financial position of the business. This
makes the process complicated and time-consuming.
§ With the strict
assessment of banks, it is very difficult to obtain a bank guarantee by
loss-making entities.
§ For certain
guarantees involving high-value or high-risk transactions, banks will require
collateral security to process the guarantee.
5. What are the Costs
and Charges of Bank Guarantee?
Generally, BG charges are based on
the risk assumed by the bank in each transaction. For example, a financial BG
is considered to assume more risk than a performance BG. Hence, the fee for financial
BG will be higher than the fee charged for performance BG.
Based on the type of the BG, fees are generally charged on a quarterly basis on the BG value of 0.75% or 0.50% during the BG validity period. Apart from this, the bank may also charge the application processing fee, documentation fee, and handling fee.
In some cases, security is required by the bank from its applicant, which is generally 100% of the BG value. In certain cases, collateral security or cash margin may also be accepted by the issuing bank.
Based on the type of the BG, fees are generally charged on a quarterly basis on the BG value of 0.75% or 0.50% during the BG validity period. Apart from this, the bank may also charge the application processing fee, documentation fee, and handling fee.
In some cases, security is required by the bank from its applicant, which is generally 100% of the BG value. In certain cases, collateral security or cash margin may also be accepted by the issuing bank.
6. Difference
between Bank Guarantee (BG) & Letter of Credit (LOC)
Bank Guarantee is not the same as a
letter of credit, although with both instruments the issuing bank accepts
a customer’s liability if the customer defaults. With
a guarantee, the seller’s claim goes first to the buyer, and if the
buyer defaults, then the claim goes to the bank. With letters of credit,
the seller’s claim goes first to the bank, not the buyer. Although the
seller will likely get paid in both cases, letters of credit offer more
assurance to sellers than guarantees generally do.
LOC is a financial document
which imposes an obligation on the bank to make payment to the beneficiary on
completion of certain services as required by the applicant. LOC is issued by
the bank when the buyer requests his bank to make payment to the seller on the
receipt of certain goods or services.
That is, when the buyer runs into cash flow difficulties or similar situations and thus cannot make immediate payment to the seller, he will approach his bank to make the payment to the seller on submission of certain documents. The bank will later recover the amount paid from the buyer along with the required charges.
That is, when the buyer runs into cash flow difficulties or similar situations and thus cannot make immediate payment to the seller, he will approach his bank to make the payment to the seller on submission of certain documents. The bank will later recover the amount paid from the buyer along with the required charges.
On the other hand, under BG, the bank is required to make payment to the third-party only if the applicant fails to make the payment to the third-party or does not fulfil the required obligations under the contract. A BG is essentially used to ensure a seller from loss or damage due to the non-performance by the other party in a contract.
However, there are a lot of
differences between LOC and BG.
Major differences
between Letter of Credit (LOC) and Bank Guarantee (BG)
Particulars
|
LOC
|
BG
|
Nature
|
LOC is an obligation accepted
by a bank to make payment to a beneficiary if certain services are performed.
|
BG is an assurance given by the
bank to the beneficiary to make the specified payment in case of default by
the applicant.
|
Primary liability
|
Bank retains the primary
liability to make the payment and later collects the same from the customer.
|
The bank assumes to make the
payment only when the customer defaults to make payment.
|
Payment
|
Bank makes the payment to the
beneficiary as and when it is due. It need not wait for a default to be made
by the customer.
|
Only when the customer defaults
the payment to the beneficiary, the bank makes the payment.
|
Way of working
|
LOC ensures that the amount
will be paid as long as the services are performed as per the agreed terms.
|
BG assures to compensate for
the loss if the applicant does not satisfy the specified conditions.
|
Number of parties involved
|
There are multiple parties
involved here - LOC Issuing bank, its customer, the beneficiary (third
party), and advising bank.
|
There are only three parties
involved - banker, its customer, and the beneficiary (third party).
|
Suitability
|
Generally, this is more
appropriate during the import and export of goods and services.
|
Suits any business or personal
transactions.
|
Risk
|
Bank assumes more risk than the
customer.
|
Customer assumes the primary
risk.
|
7. What is the process to obtain or
acquire a bank Guarantee (BG)?
One of
the easiest and best ways to obtain a bank Guarantee (BG) Is through Kingrise
Finance Limited. Kingrise Finance Limited was
incorporated in Hong Kong on 22-SEP-1999 as a Government Licensed Money Lender
with CR No.: 0689078. We are
leading providers of Business Loan, SME Loans, Project Financing, Recourse Loan, Non Recourse Loans
and Bank Financial Instruments such as Standby Letter of Credit Funding, Bank
Guarantee, Performance Guarantee Bond, Tender Bond Guarantee, Advance Payment
Guarantee, Bank Comfort Letter, BG/CD/BD/BCL/DLC/LOC/SLOC/SBLC etc.
Our bank
instruments, bg/sblc issuance and monetization process is simple, fast and
efficient and we offer the best rates as well as the best LTV in the industry.
Our bank
instruments, bg and sblc/sloc are issued from prime banks such as Barclays
Bank London, Standard Chattered Bank, HSBC
Hong Kong or any rated AAA bank of your choice. All our financial
instruments are Cash-Backed and can be used as collateral to secure funding for
projects, Discounting, Monetization and Private Placement Programs (PPP)..
Why Choose Us?
- Fast Turnaround
- Best Top Rated Banks
- Competitive Low rates
- No prepayment penalty
- 2 Days for Commitment
- Extremely Satisfied Clients
- WE KEEP OUR PROMISE
- 20 Years of Experience & Trust
- No Personal Collateral Required
- Solutions for every customer & every industry.
- Loan amounts from $1 million to over $500 million
- Fast Approvals & Fast Funding- Closing in as little as 5 days
BROKERS: We welcome new brokers who are
direct to their client. New brokers are welcomed and are
rewarded with 2% commission on every deal they bring to us.
Kindly
contact Us today for all your funding needs, including business loan, sme
Loans, project financing, Lease bg, Lease sblc, Bank Guarantee Provider
Website: www.kingrisefinance.com
Email: info@kingrisefinance.com
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