Bank Guarantee (BG) is an agreement between 3 parties viz. the bank, the beneficiary (party to whom the guarantee is given) and the applicant (party who seeks the bank guarantee from the bank).
Bank Guarantee is a product of Working Capital Finance.
Working Capital Finance
Each business has its own unique set of requirements so we have a dedicated team of experts who work with you to understand the specific nature of your business and structure solutions most suitable for you. We offer a complete bouquet of working capital facilities to help you manage your cash flow and ensure the smooth running of your business.
A working capital loan is a loan that has the purpose of financing the everyday operations of a company. Working capital loans are not used to buy long-term assets or investments and are instead used to cover accounts payable, wages, etc. Companies that have high seasonality or cyclical sales cycles usually rely on working capital loans to help with periods of reduced business activity.
Features and benefits:
Quick and hassle-free process
Customised and flexible financial solutions
Business Guarantee Terminology
BG is issued by the bank on the receipt of the request from the “applicant” for the “guarantee amount” towards some purpose / underlying transaction towards the “beneficiary”. If the bank i.e. “the guarantor” receives the “claim” from the beneficiary, it results in “BG invocation”. In the case of foreign BG, apart from these 3 parties, there is also a “correspondent bank”. If a bank does not have a branch in some foreign country, it issues BG in that country through its “correspondent bank”. The bank does all the required due diligence, financial and business analysis before issuing the guarantee.
Features of A Valid Guarantee :
The period till which the guarantee holds is clearly specified
Guarantee is always issued for a specific amount
The purpose of the guarantee is clearly stated
Guarantee is valid for a specifically defined period
The grace period allowed to enforce guaranteed rights is also stated in the guarantee
Guarantee clearly states the events under which it can be enforced
It is important that guarantee can be enforced based on terms of the contract (i.e. guarantee agreement) existing between the bank and the beneficiary. Generally, beneficiaries do state a clause to be included for charging penal interest in the case of delayed payment. Hence, it is essential for the bank to be cautious while finalizing the format and text of the contract (the guarantee agreement). While signing the same, the provision of penal interest and clauses attached to delays and default are to be carefully noted.
Important Type of Bank Guarantee :
Financial Guarantee: Here, the bank guarantees that the beneficiary will meet the financial obligation and in case he fails, the bank as a guarantor is bound to pay.
Performance Guarantee: Here the guarantee issued is for honoring a particular task and completion of the same in the prescribed/agreed upon manner as stated in the guarantee document.
Bid Bond Guarantee: As a part of the bidding process, this guarantee assures that the bidder would undertake the contract he has bid for, on the terms the bidding is done.
Foreign Bank Guarantee: When a guarantee is issued for a foreign beneficiary, it is called foreign BG.
Deferred Payment Guarantee: When the bank guarantees some deferred payment, the guarantee is termed as Deferred Payment Guarantee. For example, A company purchases a machine on credit basis with terms of payment being 6 equal installments. In this case, since the payment is deferred to a later period, creditor seeks deferred payment guarantee for an assurance that the payment would reach him in the given time period.