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WHAT IS BANK GUARANTEE (Direct and Genuine Providers Of Bank Guarantee)

A bank guarantee is a kind of guarantee from a lending organization. The bank guarantee signifies that the lending institution ensures that the liabilities of a debtor are going to be met. In other words, if the debtor fails to perform the obligation, the bank will cover it.

A bank guarantee is a promise from a bank or other lending institution that if a particular borrower defaults on a loan, the bank will cover the loss. note that a bank guarantee is not the same as a letter of credit.

How Does a Bank Guarantee Work?

The bank guarantee means that the lender will ensure that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it. A bank guarantee enables the customer, or debtor, to acquire goods, buy equipment or draw down a loan.

Bank Guarantee Example.

A credit security bond serves as collateral for repaying a loan. A rental guarantee serves as collateral for rental agreement payments. A confirmed payment order is an irrevocable obligation where the bank pays the beneficiary a set amount on a given date on the client’s behalf.

Let’s assume Company AC is a small, relatively unknown Construction company that would like to purchase $5 million of Construction equipment. The equipment vendor may require Company AC to provide a bank guarantee in order to feel more confident that it will receive payment for the equipment it ships to Company AC.

To obtain this bank guarantee, Company AC requests one from its preferred lender (usually the bank with which it keeps its cash accounts). The lender provides the guarantee in writing, which is then passed on to Company AC and its vendor. Company AC’s lender essentially becomes a co-signer on the purchase contract with the vendor.

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Why a Bank Guarantee Matters.

The bank guarantee means that the lender will ensure that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it. A bank guarantee enables the customer, or debtor, to acquire goods, buy equipment or draw down a loan.

Understanding Bank Guarantees.

A bank guarantee is when a lending institution promises to cover a loss if a borrower defaults on a loan. The guarantee lets a company buy what it otherwise could not, helping business growth and promoting entrepreneurial activity.

There are different kinds of bank guarantees, including direct and indirect guarantees. Banks typically use direct guarantees in foreign or domestic business, issued directly to the beneficiary. Direct guarantees apply when the bank’s security does not rely on the existence, validity, and enforceability of the main obligation.

Uses Of Bank Guarantee.

(1) Use BG to guarantee a loan
(2) Import / Export Trade
(3) Collateral for Project Finance
(4) Use for Trading purpose (Exemple Trading PPP)
(5) Purchase Bank Instrument (Bank Debentures)
(6) Other Credit Enhancement: Purchase REO Pool / Real Estate / Businesses and Companies.

Bank Instrument Institutions.

Top Money Center Bank: HSBC, Deutsche Bank, Credit Suisse, Standard Charter.International Banks: United States, Switzerland, French, United Kingdom.

Key Takeaways

* A bank guarantee promises that if a party with whom you have a contract fails to fulfill their debt or obligation, a bank will cover the loss.

* There are different types of bank guarantees, including shipping, loan, advanced payment, and deferred payment guarantees.

* Unlike with a letter of credit, a bank will only intervene if a party defaults on their debt or obligation.

How Bank Guarantee is initiated?

Bank Guarantee is the agreement between 3 parties i.e the bank, the beneficiary, and the applicant. The applicant of a bank guarantee is one who seeks the bank guarantee from the bank and the beneficiary is one who takes the bank guarantee. Business Customers and Individual customers both may use bank guarantees to secure the sales amount. Bank Guarantee is not difficult to obtain. The Account holder contacts the bank and fills out an application that identifies the guaranteed amount and the reason for the guarantee. Applications mention a specific period of time for which the guarantee should be valid and any special conditions for the payment and details about the beneficiary. Collateral may require some time. This can be in the form of a pledge agreement for assets, such as stocks, bonds, or cash counts. However, liquid assets are not acceptable for collateral. Bank guarantees are an important banking arrangement and play a vital role in promoting international and domestic trade.

Types of Bank Guarantee.

There are several types of Bank Guarantee a business can be used, such as:

1. Performance Guarantee — is made between a client and the contractor to ensure that work will be done as per the agreement.

2. Bid Bond Guarantee — Through Bid bond contractors ensure that the contractors will ensure the bid contracts and will fulfill the job responsibilities at agreed price.

3. Financial Guarantee — Given the guarantee to take the responsibility for another company’s financial obligation if that company can not meet its obligations.

4. Advance or deferred payment guarantee.

Advantages of Bank Guarantees.

To the applicant:

* Small companies can secure loans or conduct business that would otherwise not be possible due to the potential riskiness of the contract for their counterparty. It encourages business growth and entrepreneurial activity.

* The banks charge low fees for bank guarantees, normally a fraction of 1% of the overall transaction, for the assurance provided.

To the beneficiary:

* The beneficiary can enter the contract knowing due diligence’s been done on their counterparty.

* The bank guarantee adds creditworthiness to both the applicant and the contract.

* There is a risk reduction due to the bank’s assurance that they will cover the liabilities should the applicant default.

* There is an increase in confidence in the transaction as a whole.

Disadvantages of Bank Guarantees.

* The involvement of a bank in the transaction can bog down the process and add an unnecessary layer of complexity and bureaucracy.

* When it comes to particularly risky or high-value transactions, the bank itself may require assurance on the part of the applicant in the form of collateral.

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.

BGs reflect the confidence of the bank in your business and indirectly certify the soundness of your business.

Bank Guarantee structure.
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Bank Guarantee (BG) is an agreement between 3 parties viz. the bank, the beneficiary, and the applicant. The beneficiary is the one who takes the guarantee. And the applicant is the party who seeks the bank guarantee from the bank.

Bank Guarantee Charges.

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.

Bank Guarantees vs. Letters of Credit.

A Bank Guarantee is similar to a Letter of credit in that they both instil confidence in the transaction and participating parties. However the main difference is that Letters of Credit ensure that a transaction goes ahead, whereas a Bank Guarantee reduces any loss incurred if the transaction does not go to plan.

At Bectic Finance Company Limited, we provide Bank Guarantee services to our clients global- UK, USA, UAE, Europe, India, China, Asia, Middle East and Africa.

Contact Bectic Finance Company Limited with your request via email and we will provide you with our forms and procedures.

For more information, please contact us:

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Brokers are welcomed, appreciated and compensated. We pay good commission on each successful transaction, so you can bring customers to us and get good compensation.

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