A bank grantee means giving something as security. A bank guarantee acts as a document when a bank offers surety or guarantee for different business obligations on behalf of their customers. The lending institutions provide bank guarantee that promises to cover the customer loss. It acts as an assurance to the beneficiary that the financial institution will uphold between the customer and the third party if the customer is unable to do it.

What is the meaning of a bank guarantee?

A Bank guarantee is a promise that is made by the bank to a third person to undertake the risk of payment on behalf of a customer. And, leased bank guarantee is the cash-backed bank guarantee of a third party for a fee. Bank guarantee monetization providers will lease a guarantee to a customer which is deemed to be creditworthy for a set fee for a certain period.

What is it to monetize?

Monetize refers to the process of turning non-revenue-generating things into cash. The term is also called liquidating an asset or object or bank guarantee monetization. It is a process of turning an asset into legal tender. It can be used informally to exchange the possession for a cash equivalent. However, in the US the term to monetize debts is also a process where the Federal Reserve purchases government debts following the liquidation of individual holdings.

For example: if a company gets a bank guarantee to secure a contract with a customer then the company can monetize the guarantee. They can use it as collateral to borrow money from a government or private business lender. Then the lender will be willing to lend money to the company because it knows that it can recoup the amount from the bank if the company fails to fulfill all the regulations that have been mentioned in the contract.

What are the uses of a bank guarantee?

The seller is assured of the payment by the bank in case of buyer default therefore both the seller and the buyer got the assurance of the payment.

When large companies purchase any item from the small vendors then they are required to provide any kind of guarantee to them where the seller is assured of payment from the bank in case of any default of the buyer.

A Bank guarantee helps in certifying the credibility of the individuals which enables them to obtain loans and it also assists in business activities.

Advantages of bank guarantees!!!

Bank guarantees have their benefits or advantages. The advantages are:

• A Bank guarantee reduces the financial risks that have been involved in a business transaction.
• As there is a low risk of payment, it encourages the seller to expand their business without financial worries.
• Banks generally charge low fees for guarantees which is highly beneficial for small-scale businesses.
• Banks analyze the financial stability of a business so their credibility increases which increases the business opportunities.

Types of bank guarantees

A bank guarantee is for a specific amount or a predetermined period. It states the circumstances under which the guarantee is applied to the contract. It can be either financial or based on performance.

• Financial bank guarantee

In this financial bank guarantee, the bank gives the guarantee that the buyer will repay the debts that are owed to the seller. If the buyer is defaulted and cannot complete all the regulations then the buyer will be charged. Also, the bank assumes the financial burden on itself incurring a small fee for proving the bank guarantee.

• Performance-based guarantee

The performance-based guarantee serves as collateral for the buyer’s costs in case the goods and services are not provided as listed in the contract.

What is the difference between a Bank guarantee and a letter of credit?

Some people consider both the bank guarantee and the letter of credit offered by the bank instrument providers similar but in reality there is a difference between the two. However, both are used by the banks in accepting the customer’s liability if the customer defaults. In a bank guarantee, the seller’s claim first goes to the buyer and if the buyer defaults then the claim goes to the bank which has provided the guarantee. However, in the case of the letter of credit, the seller’s claim first goes to the bank not directly to the buyer. In both cases, the seller is likely to get paid however letter of credit offers more assurance to sellers than guarantees generally do.

The letter of credit is a financial document that imposes an obligation on the bank to make payment to the beneficiary after completion of the services. LOC is a document issued by the bank when the buyer requests a bank to make payment to the seller on completion of goods and services. Later on, the bank will recover the amount paid from the buyer along with the charges as mentioned in the document.

On the other hand, in bank guarantee, the bank pays to the third party only if the applicants fail to do so. A Bank guarantee works to ensure that a seller can recover from loss and damage caused due to the default of the third party.

What is the bank guarantee eligibility and process?

Any person or any organization that has a good financial record can easily apply for a bank guarantee. A bank guarantee can be applied by a business in his bank or any other kind of entity or financial institute that is providing such kind of services for a fee. Before a bank approves the bank guarantee, the bank analyzes the creditworthiness, liquidity, CIBIL score, and the banking history of that organization or an individual. Apart from that, the bank examines the BG period, beneficiary details, and the value of the individual because these entities are required for the approval of a bank guarantee. As the banks require security to recover their loan before they provide any guarantee. Once all the banking officials are satisfied with the creditworthiness of an individual and the organization then only a bank guarantee will be approved by the bank.

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