Importance Of Bank Guarantee

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What Is Bank Guarantee

An essential component of any large order business transaction is advance cash payments and/or proof of liquidity. The seller of the product or service may want to see that the buyer has favorable cash or bank position to pay off the debt and the buyer needs a proof to show to the seller that the firm can be trusted for business transaction.

The instrument used during such circumstances is the Bank Guarantee. It is an important document and during the course of any business is needed more than one time.

Hence in this article we will discuss more about Bank Guarantee document.Bank Guarantee is also known as demand guarantee and sometimes referred to as standby letter of credit. Though there are some simple differences between these terms. In the USA, the term demand guarantee is more popular.

The need of a bank guarantee arises when party A doesn’t trust Party B enough to hand over cash and Party B doesn’t trust Party A’s solvency and therefore Party A’s ability to fulfill the contract.

To bridge this gap of trust Party A takes the help of its Bank, which gives a official promise or guarantee in writing to Party B, that its client Party A is solvent and in case Party A is not able to fulfill the contract and becomes insolvent, the bank will perform the duty.

A bank guarantee thus is a document given by a bank which guarantees or assures a company or person that the liabilities of the buyer or debtor will be met in case the buyer fails to settle the debt taken from the creditor. In recent times bank guarantee is needed for all major tenders and response for proposals for every business such as manufacturing, IT, Services etc.

Bank guarantee hence is a promise made by a bank to cover the debt of its client in case of a default.This guarantee most importantly helps to mitigate the following risk – Judgment risk involving failure in court disputes, execution risks involving insolvency of one party and finally jurisdictional risk which covers costs, difficulty and the value of time.

Bank guarantee is mainly used as a financial security tool, where as it can be used for many other purposes too. In business world bank guarantee helps to avoid initial cash transactions before an order is sealed, for example in tender response submissions. Thus it helps companies to maintain their liquidity as well as their trust factor in the market.