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, the bank agrees to cover the obligation if the debtor fails to meet it.Bank guarantees serve as a way to facilitate and expand business activity that might not otherwise happen. Zoomers is a newly formed retail clothing store. Zoomers orders $50,000 worth of merchandise from Styles clothing manufacturer. Styles wants to sell the merchandise, but is concerned about payment because Zoomers does not have a credit history. Before accepting the order, Styles asks Zoomers to provide a bank guarantee. After confirming Zoomers credit-worthiness, the bank agrees. Now if Zoomers defaults on payment, the bank must pay Styles the amount due. As an example of a bank guarantee for performance, assume LMD Corp wins a contract to build a government office building in the country of Latvia. LMD Corp is new to international business. Latvia asks that LMD Corp provide a bank guarantee on its performance. Once Latvia receives the bank guarantee, it becomes more assured that the office building will be constructed, or in the alternative, the guarantor bank will provide financial compensation should LMD Corp fail to build it.