Bank Guarantee (BG)
A guarantee from a lending institution ensuring that the liabilities of a debtor will be met. In other words, if the
debtor fails to settle a debt, the bank will cover it. A Bank Guarantee enables the customer (debtor) to acquire
goods, buy equipment, or draw down loans, and thereby expand business activity.
The difference between a Bank Guarantee and a Letter of Credit?
A Bank Guarantee and a Letter of Credit are similar in many ways, but they are two different things. The main
difference between the two Credit security instruments is the position of the bank relative to the Buyer and
Seller of a good, service or basket of goods or services in the event of the Buyer's default of payment.
These financial instruments are often used in trade financing when suppliers, or vendors, are purchasing and selling goods to and from overseas customers with whom they do not have established business relationships.
A Bank Guarantee is a guarantee made by a bank on behalf of a customer (usually an established corporate customer) should it fail to deliver the payment, essentially making the bank a co-signer for one of its customer's purchases. Should the bank accept that its customer has sufficient funds or Credit to authorize the guarantee, it will approve it.
A guarantee is a written contract stating that in the event of the borrower being unable or unwilling to pay the debt with a merchant, the bank will act as a guarantor and pay its client's debt to the merchant. The initial claim is still settled primarily against the bank's client, and not the bank itself. Should the client default, then the bank agrees in the Bank Guarantee to pay for its client's debts.
This is a type of contingent guarantee. A Bank Guarantee is more risky for the merchant and less risky for the bank. However, this is not the case with a Letter of Credit. While a Letter of Credit is a similar, the principal difference is that it is a potential claim against the bank, rather than a bank's client.
For example, a Seller may request that a Buyer be provided with a Letter of Credit, which must be obtained from a bank and which substitutes the bank's Credit for that of its client. In the event that the borrower defaults, the Seller would go the Buyer's bank for the payment. The Seller's risk is mitigated because it is unlikely that the bank will be unable to pay the debt.
A Letter of Credit is less risky for the merchant, but more risky for a bank. Banks accept full liability in both cases. With a Bank Guarantee, a client can default and the bank assumes the liability. With a line of Credit, liability rests solely with the bank, which then collects the money from its client.
ASSIGNMENT OF PROCEEDS
A bank guaranty is a promise from a bank or other lending institution that if a particular borrower defaults on a loan, the bank will cover the loss. Note that a bank guarantee is not the same as a letter of credit.A letter of credit is written commitment document issued by a bank or other financial institutions to assure payment to seller on the basis of documentary proof on fulfillment of performance by seller as per terms and conditions mentioned in LC. A bank guarantee is a commercial instrument guaranteeing by bank to a party (parties) on behalf of his customer, assuring the beneficiary to effect payment on default of obligation.