Bank Guarantee FAQs

Feb 05, 2021 - 10:23 AMAuthor - Emerio Banque

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1. What Is A Bank Guarantee(BG) ?

A bank guarantee is a type of trade finance instrument issued by a bank or financial institution to ensure that the liabilities of the borrowers will be met. In the event, if the borrower fails to pay the debt, it will be covered by the lending institution.

2. How bank guarantee is different from a letter of credit?

The only difference between Bank guarantee and letter of credit is that letters of credit services ensure that a particular transaction goes the way it is planned, whereas a bank guarantee covers losses incurred if the borrower defaults.

3. What is the process of a bank guarantee?

To take the benefits of bank guarantee services, the borrower needs to apply to his bank and fill-up an application that states the amount of and reasons for applying for the bank guarantee. In some cases, banks require collateral which can be stocks, bonds, or cash accounts.

4. What is the difference between a bank guarantee and collateral?

Bank guarantee Vs collateral - The only difference is that a bank guarantee is a legal commitment by an issuing bank or financial institution of paying debt amount to the beneficiary in case if the borrower defaults, whereas, in collateral, the borrower is required to pledge one or more of his assets as a security to the lender.

5. How many types of bank guarantee services?

There are two essential types of bank guarantee which are: Financial Guarantee and Performance Guarantee.

6. Who is the beneficiary in a bank guarantee?

A bank guarantee is a legal contract between the applicant (The party who requests a bank guarantee from the bank), the bank (Who issues bank guarantee), and the beneficiary (who receives a guarantee).

7. What documents are needed for a bank guarantee?

The required documents for a bank guarantee include - Printed application form for Bank Guarantee, Board Resolution for a Private Limited Company/Limited Company, and a Request Letter and Counter Indemnity cum Memorandum.

8. What is the limit of a bank guarantee?

If you have only one account and put cash into your UK banks or building societies, it is protected by the Financial Services Compensation Scheme (FSCS). The deposit protection limit is £85,000 per authorized firm.

9. Why should I apply for a bank guarantee?

Bank guarantee(BG) ensure that the liabilities of the borrower will be fulfilled. In the event, if the borrower fails to pay the debts, it will be covered by the issuing bank. The bank guarantee services enable the borrower or debtor or customer to purchase goods, buy equipment or apply for a loan.

10. What are the advantages of a bank guarantee?

There are many advantages of bank guarantee such as:
   
     1. Reduced financial risks

     2. Guarantee of performance of terms & conditions of the contract

     3. Better expansion opportunities for overseas businesses.

     4.No advance payments

     5.Proof of borrower’s credibility

     6.Less documentation work

     7.Legally backed-up by a recognized institution.


11. What happens when a bank guarantee expires?

If the BG is not invoked within the expiry period and the original BG is not returned, banks forward registered letters to the beneficiary to get the original BG. if no response, it gets canceled and the margin money provided by the applicant is released.   

12. What is the difference between the expiry date and claim date in the bank guarantee?

The time-gap between the issue date and the validity date is known as the validity period while the period between the validity date and the claim date is the claim period.

13. How is the bank guarantee limit calculated?  

We can calculate the limit by dividing the annual consumption of raw material to be purchased against BG by 12 and multiplied by total time.

Recommended Read: LC Frequently Asked Questions & Answers


14. What is a guarantee cover?

A guarantee is a legal commitment made by a third party to cover the borrower’s debt or any other type of liabilities in the event if the borrower defaults.

15. How to cancel a bank guarantee?

You can approach the bank with the original guarantee to cancel it.

16. What is the cost of bank guarantee services?

Depending on the type of bank guarantee, the fee is generally charged every quarter on the BG value of 0.75% or 0.50% during the BG validity period. Additionally, the bank may also charge the application processing fee, documentation fee, and handling fee.

17. What is the LC bank guarantee?

Under an LC, the seller gets an on-time payment guarantee for his delivered goods & services from the buyer’s bank whereas a bank guarantee is a commercial trade finance instrument issued by a bank to the beneficiary on behalf of its applicant ensuring the guaranteed payment on default of obligation.

18. Can the bank guarantee be extended?

The issuing banks can put an essential clause in their bank guarantee to initiate the automatic extension of the validity period of the guarantee by 6 months. It can also get an undertaking from the customer while establishing a guarantee to avoid any possible complications in the future.

19. What is an open-ended BG?

An open-ended guarantee is a guarantee that does not have any fixed expiry date. For example, the Judicial Award guarantee. It expires 90 days from a final judgment.

20. Where is the bank guarantee on the balance sheet?

It is shown as the contingent liability in the balance sheet.

21. What is the difference between SBLC and bank guarantee?

Bank guarantee helps importers and exporters avoid the risk of non-payment and non-performance where standby letter of credit(SBLC) protects only beneficiaries. There is only a single bank in bank guarantee whereas SBLC involves a third-party bank (generally a foreign bank) also to cover both financial and non-financial risks of the guarantee.

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