Bank Guarantee
AdvancedA bank guarantee is a promise by a bank to pay a specified amount to a beneficiary if its customer fails to meet an obligation, such as paying for goods or completing a contract.
Bank guarantees give the beneficiary confidence that it will be compensated if the customer defaults. They are common in construction, international trade, property leases and government contracts.
Common types include performance guarantees, which cover failure to complete a contract as agreed; advance payment guarantees, which protect a buyer that has paid in advance; bid bonds, which ensure a company that wins a tender will sign the contract; and payment guarantees, which ensure a supplier is paid.
For example, a construction company winning a contract to build a school might need to provide a performance guarantee of 10% of the contract value. If it fails to complete the work, the client can claim that amount from the bank.
The bank charges a fee for the guarantee and usually requires the customer to provide collateral or have a credit line. A letter of credit is mainly a payment method, while a guarantee is mainly a backup used only if something goes wrong. In the United States, standby letters of credit are often used instead of guarantees.
For worked examples and full lessons, visit notesbysara.org.