When customers and seller of international transactions are in different and unknown countries, bank guarantees allow them to do business in a safe and reliable way.
We could define bank guarantees as the commitment given by the financial institution (guarantor) to pay a certain amount to the beneficiary (usually the exporter) if it presents documents previously agreed upon and which confirm that the other party has not complied with its obligations (the payment of the importer normally). Through a bank guarantee, the exporter is assured of recovering the goods delivered even if the buyer does not pay.
The guarantor agrees to pay the nominal price of the document if they buyer fails to do so. Bank guarantee is the term most commonly used for this type of instrument.
In order for bank guarantees to be valid, they need to specify the period for which the bank can pay for the merchandise. Bank guarantees do not have indefinite duration. If the guarantee is not used, it means that the transaction was satisfactory for the importer and exporter and the bank does not need to mediate.
There are three basic kinds of bank guarantees:
The financial institution shows its willingness to grant a bank guarantee to the company, but reserves the final approval until it has thoroughly studied the proposal for their client.
There are technical bank guarantees. Those are given to organizations that have orientations towards helping the public or represent international entities.
Bank guarantees are most commonly given for economic and financial purposes. Banks commit to fulfill the obligations of the buyer in the case the latter fails to do so. Bank guarantees are useful for commercial and financial transactions.
In the event that the guarantee is made to the importer, it means that the importer has claimed payment for the production or processing of goods to be supplied. That is why the buyer wants to ensure the recovery of the sum advanced for any breach of contract by the other party.
On the other hand, when bank guarantees are given to an exporter it means that the exporter is protected against noncompliance of the importer. These types of bank guarantees make sure that the importer makes the payments for the merchandise it has received on a timely basis, otherwise the bank would cover those responsibilities.
Tags: development financing, Finance, international financing, project financing, project funding, project investment, venture capital, venture capital firm, venture capital firms, venture capital funds