Loading the player...

What is a 'Bank Guarantee'

A bank guarantee is a guarantee from a lending institution ensuring the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank covers it. A bank guarantee enables the customer, or debtor, to acquire goods, buy equipment or draw down loans, and thereby expand business activity.

BREAKING DOWN 'Bank Guarantee'

A bank guarantee is a lending institution’s promise to cover a loss if a borrower defaults on a loan. The guarantee lets a company buy what it otherwise could not, helping business growth and promoting entrepreneurial activity. For example, Company A is a new restaurant wanting to buy $3 million in kitchen equipment. The equipment vendor requires Company A to provide a bank guarantee to cover payments before shipping the equipment. Company A requests a guarantee from the lending institution keeping its cash accounts. The bank essentially cosigns the purchase contract with the vendor.

Types of Bank Guarantees

A direct guarantee is typically used in foreign or domestic business and issued directly to the beneficiary. The guarantee applies when the bank’s providing security is not reliant on the existence, validity and enforceability of the main obligation. Guarantees are often chosen for cross-border transactions since the beneficiary asserts claims rapidly due to the general nature of the guarantee. A direct guarantee is easier to adapt to foreign legal systems and practices due to not having form requirements.

An indirect guarantee is often issued for export business, especially when government agencies or public entities are beneficiaries. Many countries do not accept foreign banks and guarantors because of legal issues or other form requirements. With an indirect guarantee, a second bank, typically a foreign bank with a head office in the beneficiary’s country of domicile, is utilized.

Examples of Bank Guarantees

*A bid bond prevents companies from tendering bids and not accepting or executing the awarded contract.

*A performance bond serves as collateral for the buyer’s costs incurred if services or goods are not provided as agreed in the contract.

*An advance payment guarantee acts as collateral for reimbursing advance payment from the buyer if the seller does not supply the specified goods per the contract.

*A warranty bond serves as collateral ensuring ordered goods are delivered as agreed.

*A payment guarantee assures a seller the purchase price is paid on a set date.

*A credit security bond serves as collateral for repaying a loan.

*A rental guarantee serves as collateral for rental agreement payments.

*A confirmed payment order is an irrevocable obligation where the bank pays the beneficiary a set amount on a given date on the client’s behalf.

RELATED TERMS
  1. Leased Bank Guarantee

    A bank guarantee that is leased to a third party for a specific ...
  2. Guarantee Company

    A form of corporation designed to protect members from liability, ...
  3. Guaranteed Loan

    A loan guaranteed by a third party in the event that the borrower ...
  4. Guaranteed Stock

    An infrequently used form of common or preferred stock, whose ...
  5. Guaranteed Bond

    A debt security that offers a secondary guarantee that interest ...
  6. Unsecured

    A loan or equity interest that is given without any guarantee ...
Related Articles
  1. Investing

    What's a Bank Guarantee?

    Bank guarantees are used to assure a third party of payment or performance of an obligation. The obligation can be either to pay an amount due or to perform on a contract. By granting the guarantee, ...
  2. Retirement

    The Cost Of Variable Annuity Guarantees

    These products tempt investors with some impressive benefits - but they come at a price.
  3. Insurance

    Does Buying a Guaranteed Life Insurance Policy Make Sense?

    When does it make sense to buy a life insurance policy that is guaranteed?
  4. Taxes

    What's a Debtor?

    A debtor​ is an individual or company that owes money.
  5. Investing

    Will the Next Financial Crisis Come From Europe? (DB, CS)

    Discover why the European financial system might be in trouble, why the European Central Bank may turn to bailouts, and why that is probably a mistake.
  6. Personal Finance

    Retail Banking Vs. Corporate Banking

    Retail banking is the visible face of banking to the general public. Corporate banking, also known as business banking, refers to the aspect of banking that deals with corporate customers.
  7. Investing

    Find Security In Covered Bonds

    Find out about a safe investing alternative that could have prevented the subprime meltdown.
  8. Investing

    How Does Securities Lending Work?

    Securities lending is the act of loaning a stock or other security to an investor or firm.
  9. Investing

    Securities Lending: Cause Of The Next Financial Crisis?

    Securities lending can pose risks to investor's portfolios and the entire financial system.
  10. Insurance

    Are You Protected If Your Insurance Company Goes Belly-Up?

    Consumer protection against insurance company failures actually falls into the hands of state governments. How much protection do you have?
RELATED FAQS
  1. How does a company obtain a bank guarantee?

    Find out how bank guarantees work, why they are issued and the process that a business normally goes through to acquire one ... Read Answer >>
  2. What is the difference between a bank guarantee and a bond?

    Understand what a bank guarantee is and what a bond is, and which one is a debt instrument. Learn the differences between ... Read Answer >>
  3. How is a bank guarantee different from a traditional loan?

    Read about the differences between a traditional bank loan and a bank guarantee, and why a third party might require a guarantee ... Read Answer >>
  4. What's the difference between a letter of credit and a bank guarantee?

    Learn how letters of credit and bank guarantees differ, how they are used by banks and companies, and how buyers apply to ... Read Answer >>
  5. What's the difference between a bank guarantee and a letter of credit?

    A bank guarantee and a letter of credit are similar in many ways but they're two different things. Letters of credit ensure ... Read Answer >>
  6. Are U.S. banks authorized to issue bank guarantees or medium term notes (MTNs)?

    Bank guarantees and medium term notes (MTNs) are different types of instruments that serve different purposes for corporations. ... Read Answer >>
Trading Center