What is Bank Guarantee?

I can help you understand what is BG in banking. BG here stands for Bank Guarantee. A bank guarantee is a promise which secures the payment of a third party on behalf of their customer in a business transaction. I have shared more on what bank guarantee below. So, you can read it to understand things better.

What is Bank Guarantee in Banking?

To simplify bank guarantee, let me share an example with you:

Suppose a company is new in the market and wants to purchase raw materials worth x rupees from the vendor. Now, the raw material vendor asks for a bank guarantee to cover the payments before the raw materials are supplied to the company. The company applies for a bank guarantee and receives it from the bank having its cash accounts. Here, the bank will cosign the purchase contract along with the vendor. 

Now, if the company defaults or isn’t able to pay back to the vendor, the bank will cover the pay on behalf of the company. 

1. The first is the applicant, which is the party that requests for a bank guarantee.

2. The second is the beneficiary, which is the party that receives a partial guarantee.

3. The third is the bank, which approves the bank guarantee, and signs and confirms the payment to the beneficiary if the applicant fails to repay the amount.

This is all from my side. I hope you now know about bank guarantee what is it.

In my opinion, a bank guarantee is a financial tool as well. This is given to a company by a bank or other loan company. Its job is to ensure that the money loaned is repaid, even if you as a borrower miss on payments. The debt is usually covered by the issuing body. So let me tell you the bank guarantee meaning.

What is bank guarantee?

A bank guarantee is essentially an assurance to a business organisation from a lender, generally a bank or other finance company. It ensures that if you as a borrower fail to pay the amount, the issuing body will come in to cover all the costs. This equipment is mostly utilised within the limits of the local area.

Pros of bank guarantee:

• The costs and risks associated with a business operation are reduced by a bank guarantee.

• It promotes the seller/beneficiaries to build their organisation on credit terms because of the low risk.

• Guarantees are usually charged at a reasonable rate by banks, which benefits even small businesses.

• When banks examine and verify a company's financial viability, it gains credibility, which leads to more commercial opportunities.

• The guarantee usually only requires a little paperwork and is approved quickly by banks.

Cons of bank guarantee:

• Banks can be extremely strict when appraising a company's financial situation. This makes the procedure time-consuming and challenging.

• Loss-making firms find it difficult to secure a bank guarantee due to banks' strict requirements.

• Banks will seek collateral security to complete some assurances requiring significant or high-risk operations.

Eligibility criteria for bank guarantee:

If you have a strong credit history, then you are able to apply for BG. A firm can use BG in its bank or any other bank that provides similar services. The bank will examine your previous banking record, credit, stability, CRISIL, and CIBIL ratings before issuing the BG.

For approval, the bank would additionally look at the BG duration, value, beneficiary information, and currency. In some situations, banks will demand you to provide securities to match the BG amount. Once all of the criteria have been met, the banking officials will issue the appropriate approvals for the BG processing.

I hope you understood the bank guarantee meaning.