Understanding Bank Guarantees- What Is A Bank Guarantee?

What Is A Bank Guarantee?

A Bank Guarantee involves a financial institution providing a guarantee that a debt will not go unpaid. This kind of transaction gives the person or institution a safety net should the debtor be unable to make good on his borrowed money. If this situation does occur, the bank that provided the Bank Guarantee is responsible for the balance owed. Bank Guarantees can provide the necessary references to obtain a loan for goods or services. By procuring this type of instrument, a business will be able to purchase the needed capital to start or maintain their services to others. Since a bank is “backing” the customer, the institution providing the loan has no reason to find the customer unworthy of a loan. Whether the customer follows through or not, the loan will still be paid back without any hassle or interference of collections agencies.

When Are Bank Guarantees Most Useful

Bank Guarantees are most useful when there is not a previous relationship between two parties. International transactions are one example of this necessary safety net. Since there is no pre-existing relationship, one party will have no proof that the other will follow through on his or her promises. A bank guarantee takes the risk out of this situation, and allows both parties to participate freely, knowing that the transaction will be followed through, whether by the original party, or by the bank offering the guarantee. Risks are certainly a part of business, but unnecessary ones are not.

Do You Need A Bank Guarantee?

The answer to this question is found in the answer to a few other questions, such as: Would you profit from transactions that you fear might not work out were you to become involved? Could you provide your services more freely and more widely if the risk of the other party not following through were lower? Simply put, a Bank Guarantee takes the fear out of stepping out on a ledge. If you know there is a safety net, you can feel free to not only walk, but do cartwheels. Think of how vast your connections and services could be if you just had a little bit of a safety net. That’s what a bank guarantee can do for your business.

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