Bank Guarantee without Collateral

Bank Guarantee without Collateral

Collateral Free Bank Guarantee or Bank Guarantee without Collateral

We offer Bank Guarantee with or without collateral, But first understand about the this :
Bank Guarantee
A bank guarantee means a promissory note issued by a bank or any other financial institution that if borrower fails to pay/service the loan, then the bank or the financial institution will take care of that loan or losses. The bank will assure the original beneficiary through this bank guarantee that if the borrower does not service or pay his liabilities, then the bank will take care of them.

A bank guarantee is a agreement between 3 different parties and these are :

• The applicant (the party that requests a bank guarantee from the bank and borrows from a creditor)
• The beneficiary (the party that receives guarantee)
• The bank (the party that agrees to sign and assures payment in case the applicant fails to repay the loan)

Types of Bank Guarantee

There are different types of bank guarantees, which are required by businesses. You may avail the one that best suits your requirements. Some of the most popular types of bank guarantees are following :

Deferred payment guarantee This type of deferred payment guarantee is the most common type of bank guarantee. Suppose, if the buyer fails to pay within the duration that is agreed upon by both parties, the bank takes the liability of paying the seller for the goods/services. Under the deferred payment guarantee, the bank makes the payment to the seller in installments in the event of non-payment by the buyer

Financial guarantee This type of financial guarantee is used in situations when a company promises to complete a project within a particular timeframe and receives funds for the same. The financial guarantee from a bank states that the money will be returned to the client if the company is not able to finish the project within the stipulated time frame.

Advance payment guarantee In this advance payment guarantee, the buyer makes an advance payment to the seller. However, this amount is refunded by the bank in case the seller fails to deliver the goods as per the contract terms.

Foreign bank guarantee Foreign bank guarantee is used in international trade deals. While most bank guarantees involve only one bank, a foreign bank guarantee may involve two banks– one from each country.

Performance guarantee Performance guarantee means that the bank will provide compensation to the buyer or recipient of the services if the goods/services are of inferior quality and don’t meet the standards that have been mutually agreed upon by both the parties.

Bid bond guarantee Bid bond guarantees are used during the bidding process for a project. When any project is up for bidding, multiple contractors compete to win it. The company or the institution awarding the project asks for a bid bond guarantee from all the bidders. This guarantee means that if the bid is accepted, the contractor will take up the project and execute it as per the required standards. If a contractor is awarded the project but is unable to take it up, the guarantee is evoked by the company and the bank makes the payment. The amount of a bid bond guarantee is generally 5-10% of the estimated project cost

Advantages of a Bank Guarantee

• Bank guarantee is mostly issued against collaterals or securities. Hence they have marginal charges as compared to the other lending instruments.
• The process of obtaining a bank guarantee is simple and can be completed quickly. This proves useful to those businesses that require urgent credit.
• For the seller, a bank guarantee substantially brings down the risk involved in trade and bridges the trust gap between both parties.
• Issuance of a bank guarantee to your name is proof of your good financial records, and can be instrumental in establishing credibility and attracting more businesses.

Documents Required for a Bank Guarantee
If you hold a current account with a bank, you need to furnish the following documents to apply for a bank guarantee:-
• An application form
• A bank guarantee letter
• A Stamp paper
• A resolution passed by the board of members in case of a public/private limited company

How does a Bank Guarantee Work?

Once the bank issues a bank guarantee, it is forwarded to the seller after which he/she proceeds to complete the trade without any upfront payment. The guarantee also defines the time period within which the buyer has to pay the seller. Once that is done, the bank guarantee becomes null and void.
In the event of non-payment by the buyer within the stipulated time frame, the seller invokes the bank guarantee and the bank is liable to pay the seller.
We will explain this better with the help of an example.
Suppose ‘company X’ manufactures apparels and receives a huge order. However, they lack the adequate resources to purchase enough raw materials to fulfill this order due to the pending payments from the previous orders.
Now, there is a ‘company Y’ that sells the raw materials that ‘company X’ requires. But they are hesitant to do business without any upfront payment and cannot merely rely on ‘company X’s’ word. So, ‘company X’ decides to apply for a bank guarantee from a bank for the total amount of the trade. The bank, upon taking a look at ‘company X’s’ financials and collateral, approves the guarantee and provides it to ‘company Y.’
This bank guarantee issued to ‘company Y’ means that if the buyer, i.e. ‘company X’ is unable to complete the payment within the stipulated time frame as stated in the document, the bank that has issued the guarantee will pay the seller.
Once ‘company Y’ receives the guarantee, it will proceed to complete the trade and supply the raw materials to ‘company X’ who then begins manufacturing the goods for the order. At a later date, within the stipulated time frame, ‘company X’ makes the required payment directly to ‘company Y.’ The bank guarantee then becomes null and void.

FAQs on Bank Guarantee

What is a bank guarantee?
A bank guarantee is a contract wherein the bank pledges to make payment on behalf of the borrower in case the borrower fails to conclude the trade as agreed upon by both parties.

When is a bank guarantee required?
Bank guarantees are required when there is a shortage of funds or the lack of trust between the two parties.

Is a bank guarantee refundable?
As soon as the applicant pays his/her dues to the seller within the stipulated time frame, the bank guarantee becomes null and void.

Who is the beneficiary in a bank guarantee?
In most cases, the seller is the beneficiary of a bank guarantee.

What is the difference between the expiry date and the claim date in a bank guarantee?
The claim date is the date on which a beneficiary claims the benefits of the bank guarantee while the expiry date is the date by which the claim has to be made.

What is the claim period of a bank guarantee?
The claim period is a time period within which the beneficiary can claim the benefits of the bank guarantee.

Where does the bank guarantee appear on the balance sheet?
A bank guarantee is considered a contingent liability.

What is the limit of a bank guarantee?
If a company regularly requires bank guarantees, the bank often issues them the guarantees with a fixed upper amount known as the bank guarantee limit.

When is a bank guarantee invoked?
A bank guarantee is invoked by the beneficiary when the borrower fails to conclude the trade as per the terms agreed upon by both parties.

Can a bank guarantee be amended?
Yes, a bank guarantee can be amended. Both, the amount, as well as, the duration can be increased or decreased by sending a formal application of the same to the bank.

Can a bank guarantee be revoked?
A bank guarantee is automatically revoked once its tenure is completed or the applicant pays the beneficiary.

Can a bank guarantee be extended?
Yes, a bank guarantee can be extended by sending a formal application of the same to the bank.

What is a bank guarantee to customs?
To avail exemption from import duties, in many cases, the importer has to submit a bank guarantee to customs along with a bond.

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Collateral Free Bank Guarantee or Bank Guarantee without collateral or FD