Bank Guarantee FAQs
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.
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