Simply defining, it is a guarantee given by the bank or any other financial institution where it states that, if the person or organization who is taking the money fails to repay the debt, then the bank will cover for the debtor.

Purpose: The Bank guarantee (BG) gives the safe platform for the transaction to occur.

For example, if any company needs a big amount of equipment in order to boost the economy, then the seller (who is selling the equipment), may ask for the guarantee from the bank before selling any equipment as this transaction will be that of high amount.

Types:

There are two types of guarantee. One is

direct and another one is indirect.

Direct: As the name suggests, it applies to those types of

guarantees given by the banks which directly

involves the beneficiary.

This type is often suitable for cross-border trades

were legal system and other liabilities makes it

difficult for the transactions to occur.

It gives a secure environment.

Indirect:

Indirect type comes into play when the system

doesn’t accept foreign banks.

In this case, an indirect type of guarantee takes

place where a mediator bank, which is a foreign

bank whose office is located in the same country

as the beneficiary, is taken up as the guarantor.

How it helps a business? Sometimes small business owners in order to expand may need to take steps which could involve lots of risks.

On the other hand, to boost the economy, these steps might be required to more or lesser extent.

Hence in these cases, by serving as the guarantor, the bank could ease the process of transition and thus, can have a direct influence on a country’s future.

How can one apply for it?

Acquiring this type of guarantee requires

various steps and banks do check upon

various factors before issuing a guarantee.

These checked up elements may include

and not limited to: trading history, credit

history, liquidity etc.

In simple words, the person or the organization

needs to show its worth before applying for the

guarantee.

It should also be mentioned that bank requires

knowing how long does the guarantee is needed

for, what amount is needed, for how long the

amount is needed, beneficiary details along with

any other information that bank may state as

important.

Only after giving this information, the bank may

decide to give a guarantee.

For examples: Tender guarantee, advance payment

guarantee, performance guarantee are some type

of guarantees.