What Is Bank Guarantee And How Does It Work?

The business is associated with risk in a certain way. This is why business partners use bank guarantees to ensure the security of negotiated transactions. If you want to know what is bank guarantee and how does it work, then here we present you the things that will help you to understand the bank guarantee.

What is a Bank Guarantee?

A bank guarantee is an agreement between the seller and a buyer where the banks work as an intermediary. Bank guarantees are issued by the banks as a promise wherein if you get fail to pay again the loan then the bank will complete your financial obligations. You can assure the creditor through a bank guarantee that if you as the borrower will fail in make the payment or complete your liabilities, then the bank will make the payments on your behalf.

The bank guarantees are typically used between business entities. The buyer makes use of the bank guarantee and buys equipment, machinery, raw materials, or gets business funds for the business. The bank guarantee works as a promise that the payment will be made on time by the buyer. The bank will undertake the payment only if the obligation is not complete on time.

Uses of Bank Guarantee

  • When large companies purchase from small vendors, they generally require the vendors to offer guarantee certificates from banks before such business opportunities.
  • Predominantly used in the sale and purchase of goods on a credit basis, where the seller is assured of payment from the bank in case of default by the buyer.
  • Helps in certifying the credibility of individuals, which in turn, enables them in obtaining loans and also assists in business activities.

There are lots of uses from a bank guarantee for the applicant, the bank must procedure the same only after the financial sustainability of the applicant/business. the risk included in offering such a guarantee has to be analyzed thoroughly by the bank.

Types of Bank Guarantee

There are different types of bank guarantee available in Dubai and their functions:

  • Performance Guarantee : A performance guarantee can be used as collateral where the transactions include a buyer and a seller. Under the performance guarantee, the bank will make compensation payments if the goods or services are not delivered on time or as promised in the contract. To invoke a performance guarantee, the buyer has to submit a written complaint stating that the seller has not completed the obligation according to the contract.
  • Bid Bond Guarantee : The bid bond guarantee is a type of construction bond that helps to safeguard the owner during a construction bidding procedure. These are used while bidding for tenders to ensure the winning bidder accepts the contract and completes its obligation according to the contract. The bid bond guarantee promises to compensate the owner in case the bidder fails to honor the terms. This type of bond is used as a proof of guarantee and implies that the bidder must devise the project according to the terms of the bid contract.
  • Financial Guarantee : The financial guarantee is an undertaking by the bank that promises to take care of the financial obligation of a company if the company is not able to complete its obligation. The financial guarantees are used by two related entities, for instance, a partner company providing a financial guarantee to a subsidiary company making sure the financial obligations would be complete when there is a delay in the project completion.
  • Advance Payment Guarantee : An advanced payment guarantee is only issued when advance payment is to be made to the seller. If the seller fails to deliver the goods or service as mentioned in the contract then the buyer has the right to invoke the advance payment and recover the full or partial advance payment made to the seller. These types of bank guarantees are generally used for global transactions and domestic trade where a large advance payment is made.
  • Deferred Payment Guarantee : A deferred payment guarantee is a guarantee for payment usually made in installments that are deferred or delayed. This type of guarantee is issued for the purchase of goods or machinery for business. the seller generally offers it as credit and the buyer’s bank undertakes the payment on the buyer’s behalf.

Document Required for Bank Guarantee

The documents that required to apply for a bank guarantee are given below:

  • Valid passport or national ID with UAE residence visa and Emirates ID of all signing authorities and shareholders.
  • Valid legal documents like trade license, free zone certificate of incorporation, certificate of commercial registration, partnership agreement, etc.
  • Power of attorney
  • Address proof
  • Information of ultimate beneficial owner
  • Company profile and bank reference
  • Audited financial statements

Also Check, Best bank in UAE for business account 2021

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