What is Bank Guarantees
A bank guarantee is a kind of what is bank guarantee from a lending institute or assurance that the financial institution gives to an external party if the borrower cannot repay the debt or meet its financial liability. In such a case, the bank will refund the amount to the party to whom the guarantee is issued. If a bank guarantee enables the customer (or debtor) to acquire goods, buy equipment, or draw down a loan.
There are different kinds of bank guarantees, which are direct and indirect guarantees.
- Indirect guarantee - Banks typically use direct guarantees in foreign or domestic business, issued directly to the beneficiary.
- Direct guarantee – it applies when the bank’s security does not rely on the existence, validity, and enforceability of the main obligation.
There are key features of the bank guarantee.
- A bank guarantee is when a lending institution promises to cover a loss if a borrower defaults on a loan.
- Parties to a loan choose direct guarantees for international and cross-border transactions.
- The guarantee provides additional risk to the lender, so loans with such a guarantee will come with greater costs or interest rates.
For example, Mr. A contracted with Mr. B to complete the project within the stipulated time. In addition, Mr. must furnish a bank guarantee so that if the project is not completed within the said time, they can recover the loss incurred by Mr. A. therefore, Mr. B shall apply for a performance guarantee as it is linked to the performance of the contract.