It definitely helps to have a third party screening for your business. While running a business, it is possible to encounter with a situation that your client may ask you to supply a strong financial guarantee from a third party. This is where the banks come into role-play. You simply need to approach your bank and request it to stand as a guarantor on your behalf. The process is referred to as a bank guarantee (BG).
This is common when a small company deals with a larger body or sometimes a government in a foreign country. For instance, when a company bags a new large project from the Government of Greece, it can get help from bank guarantee. Under such circumstances, companies all over the world may have applied to the project. The government would make selection on the basis of lowest cost. It will also consider track record submitted with the proposal form.
The government has restricted the ability to assess companies for financial stability and credit worth. It also puts a condition that the company furnishes a guarantee from a bank(s) to ensure accomplishment of project on time. So the company turns to the bank for a guarantee. The bank guarantee provider will offer service for a specified amount. This may be a fraction of the total amount of money needed for the contract.
The bank will not just issue a guarantee with its own due diligence. It performs an exhaustive investigation of the financial security of the company to evaluate the amount of guarantee it can permit. In the end, the bank is at a risk too, in the event the client fails to pay. The evaluated is referred to as the limit.
Lastly, the bank will issue a guarantee only if the company has not outdone its overall limit for Bank Guarantees.
Bank Guarantees can be broadly categorized into the following:
– Performance Bank Guarantees
– Financial Bank Guarantees
Reasons to Get Bank Guarantee
1. Offers Safety
These financial instruments act as a Safety Net in case there is a credit default. A bank providing Bank Guarantee holds all responsibility for the balance owed.
A bank guarantee provides necessary references to avail a loan for goods and services. This makes for a wonderful opportunity for the businesses to acquire the capital for financing their operations.
3. Easy Loans
With a bank guarantee, it is easier to get a loan. This is because the bank is supporting the customer and offering a guarantee. This financial instrument transfers the risk from the financial institution to the bank that provides the guarantee.
4. No Prior Relationship – More Benefits
A bank guarantee is immensely useful under circumstances where no prior relationship exists between two parties. The most common example is the deals established or accomplished within the International Trade field.
5. Minimizes Asymmetric Information Risk
This financial instrument will trigger a number of projects, transactions, and business activities.
Bank guarantees are an integral part of guaranteeing contractual compliance. These also work towards securing your legal entitlements. Hence, it is crucial to get legal advice before finally availing this financial instrument.