A guarantee is basically a legal undertaking by a bank on your behalf (the third party) where it guarantees the payment of a certain sum of money up to a certain limit to a beneficiary, in the event that your business fails to settle a debt or perform a legal obligation. A bank may take into account a number of factors before issuing a guarantee i.e. extent of liability, period expiry and credit standing.
To provide guarantee favoring a third party for performance, payment, etc.
Types of guarantees:
- Tender Guarantee or Bid Bond
- Performance Guarantee
- Advance Payment Guarantee
- Warranty of Maintenance Guarantee
- Retention Guarantee
- Security Guarantee
- Shows the customer’s capability to perform work as specified in the contract.
- Able to obtain more favorable trade terms from the beneficiary if a BG is produced.
- No necessity to raise cash to meet deposit requirements and funds could be used to support working capital requirements.
- Allows customers to have access to funds especially where BG is issued for advance payment or release of retention funds under contracts.
To expedite the release of goods which have arrived before the original transport documents.
Issuing of guarantee by the financial institution to the shipping agent to release goods without production of original transport documents.
- Usually issued where the goods are initially imported under Letter of Credit and is to be earmarked against trust receipts/banker’s acceptance facilities.
- Facilitate meeting of production or contract deadlines.