Bank guarantee

A bank guarantee is when a lending institution promises to cover a loss if a borrower defaults on a loan. The guarantee lets a company buy what it otherwise could not, helping business growth and promoting entrepreneurial activity.

There are different kinds of bank guarantees, including direct and indirect guarantees. Banks typically use direct guarantees in foreign or domestic business, issued directly to the beneficiary. Direct guarantees apply when the bank’s security does not rely on the existence, validity and enforce ability of the main obligation. Individuals often choose direct guarantees for international and cross-border transactions, which can be more easily adapted to foreign legal systems and practices since they don't have form requirements.

• Assure a seller that a purchase price will be paid on a specific date.
• Function as collateral for reimbursing advance payment from a buyer if the seller does not supply the specified goods per the contract.
• A credit security bond that serves as collateral for repaying a loan.
• Rental guarantee that serves as collateral for rental agreement payments.
• A confirmed payment order – an irrevocable obligation, in which a bank pays the beneficiary a set amount on a given date on the client’s behalf.
• Performance bond that serves as collateral for the buyer’s costs incurred if services or goods are not provided as contractually agreed.
• Warranty bond that functions as collateral, ensuring ordered goods are delivered, as agreed.