A Guarantee or Bank Guarantee (BG) is a type of demand guarantee from the bank or a financial institution. The guarantor assures that the liabilities of a debtor will be met in a stipulated time. In short, if the debtor fails to settle a liability, the guarantor will cover the claim.
A bank guarantee allows the business or a consumer, or debtor, to acquire goods, services, participating in a tender bid, or buy equipment or draw down a loan. A guarantee is a tool for a company or a consumer, by helping the business to grow and encourage the entrepreneurs.
Guarantees are classified into two categories which are the direct and indirect guarantee. direct guarantee is issued directly to the beneficiary from the applicant’s bank where there is no country or geographical risks involved. Whereas, indirect guarantees are issued as second insurance based on the previously issued guarantee from the applicant’s bank as secondary security. If a secondary bank undergoes the loss during the claim, then issuing will fulfill the obligations.
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Bid Bond or Tender Guarantee
Advance Payment Guarantee
Standby letter of credit (SBLC) - As per URDG & ISP
Letter of indemnity / Indemnity bond
Confirmed payment order
Other Bank Guarantee's
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A Bid Bond or Tender Guarantee is issued as an initial portion of the bidding process participated by the contractor, supplier or services to a project, a Bid bond widely used in government projects where the number of participants applies for a selective tender to get awarded under the bidding terms.
A Performance Guarantee or Performance Bond or Contract Bond is issued to a one-party after the tendering process awarded to the contractor or a supplier of goods or services, It is an assurance from the bank, or financial institution or insurance company in favor of a beneficiary by request of an applicant, a Performance bond utilized to support the beneficiary who are concerned about the prospect, that the applicant might become insolvent or otherwise incapable to fulfill the contractual obligations. In the event of bankruptcy, the beneficiary receives compensation from the guarantors’ bank or institution, It may reduce financial stress or other damages caused by the applicant.
Advance Payment Guarantee
Advance Payment Guarantee or Advanced Payment Bond is a bank guarantee where an issuer (bank) undertakes the obligation to draw an advanced payment to the buyer, when the seller debts and fails to deliver the goods or services, and it guarantees that the advance payment will be returned to the buyer or the beneficiary during this occurrence.
Standby letter of credit
The Standby Letter of Credit (SBLC) is an irrevocable guarantee or a commitment issued by the bank or a financial institution. A promise to the beneficiary to pay on behalf of the applicant. SBLC’s are very much alike documentary letters of credit, their main difference is that unlike DLC’s, they only become operative in case the applicant defaults, then the beneficiary in whose favor the SBLC was issued, can draw on the SBLC and demand the payment.
Warranty bond is a guarantee issued by a bank or a financial institution, A commitment of guarantee between the buyer and seller or between the contractor and the investor, It promises the buyer or an investor if any defects occurred during the warranty period will be repaired or replaced. Warranty bond mostly utilized in Construction, EPC, other heavy and consumer goods industries.
Letter of Indemnity or Indemnity bond is an instrument guaranteeing contractual provisions, that are intended to reimburse the holder for any actual or claimed loss caused by the issuer or a third party. An indemnity bond acts as coverage for loss and its financial adjustments will be made by the principal to the beneficiary or obligee. An indemnity bond often used by businesses to request reimbursement for lost shares.
Rental guarantee promises payment to a landlord in case a tenant defaults. Rental guarantees are a notable tool to protect industrial and commercial landlords to benefit if their client’s default.
Confirmed payment order is an irrevocable obligation to pay the beneficiary. It is a conditional demand for payment upon the successful completion of a project or a service.
Payment guarantee grants the supplier with financial security in case the applicant fails to pay for goods or services supplied. This will be applicable mostly on an open account basis, to avoid the country’s risk and to cover debts. This means verbiage or wording in the guarantee will vary depends upon the debt agreement between the defaulter and beneficiary. The defaulter has to oblige according to the agreement which was finalized by both parties. Mostly payment guarantee can be asset-backed and pre-approved by the issuing bank.