A bank guarantee is something that is given as security to someone. A bank guarantee is one when a bank provides surety and guarantee for the different business obligations on behalf of their customers. The process is done while following the regulations. Financial institutions provide a bank guarantee that serves as a promise to cover the loss in case the customer is unable to pay. It is a guarantee given to the financial institution for a contract between the customer and a third party.
What is the exact meaning of bank guarantee?
This bank guarantee works as a promise to the third party by the financial institute. In this, the payment risk is handled by the bank institute. It works as a contractual obligation. Normally, these kinds of guarantees are widely used in businesses to protect the third party from any kind of financial loss. The guarantee is used to buy things that are not ordinary, thus, helping a business to grow with ease while promoting a business.
Let’s understand it with a real-life example:
There is a company named ABC, which is a newly established factory. Now the factory wants to buy raw materials for Rs. 50 lakhs. To get the raw material of Rs. 50 lakhs, the third party wants a bank guarantee to have a complete surety of their payment. Therefore, they won’t ship the raw material to ABC company until they get a bank guarantee. That is why, ABC company acquires a bank guarantee at first by finding the right bank guarantee provider.
What are the different uses of a bank guarantee?
When large companies deal with small vendors, they want vendors to provide bank guarantee certificates to them so that they can have the surety of their payment. This also help in providing multiple opportunities to small business vendors.
The bank guarantee is used during the buying and selling of goods and services on a credit basis where the seller gets the assurance of getting a payment from the bank if the buyer is unable to pay the same due to any reason. Collateral is used by the bank to recover the loss amount in such a case.
The applicant gets the benefit of getting a deal by providing a bank guarantee to the seller. However, bank instrument providers provide SBLC only after analyzing the financial condition of the application. There is also an option of getting a lease bank guarantee in which an applicant has to search for lease bank guarantee providers to get SBLC on the lease. For this, the applicant has to pay a fee to get the SBLC on lease.
What are the pros and cons of bank guarantees?
Just like everything comes in this world with some advantages and disadvantages, in the same way, bank guarantee also has its own pros and cons. Here we will discuss the benefits of bank guarantee.
- Bank guarantees are used to reduce the financial risk involved in any transaction. This gives more confidence to both the parties while making a deal.
- There is only a small fee or charges associated with the bank guarantees;therefore, it is a win-win situation for small business or low-budget businesses allowing them to get more opportunities to grow and expand their businesses.
- As there is low risk associated, it encourages both the seller and buyer to expand their business based on credit.
- A bank guarantee is provided only after analyzing the financial stability of any business therefore it tells about the credibility of a business increasing more opportunity for the business while enhancing the business’s reputation in the market in terms of finances.
- One sheer advantage of bank guarantee is that it requires only a few documents to get a bank guarantee and the process is easy and quick if the documents are submitted accurately.
Disadvantages:
There is nothing that doesn’t have any flip side or disadvantages. Let’s now get to know about the disadvantages of the bank guarantees.
- In many cases, the process of getting a bank guarantee becomes complicated and time-consuming because banks become very rigid in assessing the financial condition of the applicant making the entire process challenging for the applicant.
- Also, the loss-making entities won’t be able to get a bank guarantee. Financial institutes assess the financial condition deeply before providing a bank guarantee. So, not all the businesses that want to grow get an opportunity to have a bank guarantee to get more deals quickly.
- In many bank guarantees, which involve high-risk transactions,financial institutions require collateral security to provide the bank guarantee. That makes it difficult for the applicant.
Ultimately getting a bank guarantee is the best way to make a business grow and to get more and more deals. The only disadvantage of acquiring a bank guarantee is that you have to pay a small fee associated with it.
What is bank guarantee monetization?
Now it is clear to you that what is a bank guarantee? However, you may have heard the term bank guarantee monetization. So, what is bank guarantee monetization?
Monetizing a bank guarantee means the user who acquires a bank guarantee uses the tool as collateral to get money. Monetizing a bank guarantee is a way to access additional funding to grow your business. However, there are also some risks associated with bank currency monetization. Like if a business fails to follow all the rules written under the contract, then the loan may be paid back to the lender and the guarantee amount to the beneficiary. Furthermore, the business is required to pay a fee to the bank and the lender in terms of interest rates or any accepted charges.
Monetizing a bank guarantee also provides greater flexibility to the business in terms of financing options like they can get the money at a low interest rate because the lender also gets the surety of payback or the repayment period can be finalized according to your needs and preferences.
