Bank guarantees are financial instruments used in commercial transactions to ensure the payment of obligations or commitments made by one of the involved parties. These guarantees provide security and trust to the parties involved in the transaction.
In this article we will take a further insight into these tools and their advantages.
What is a bank guarantee?
A bank guarantee is a formal commitment undertaken by a financial institution on behalf of a client (sender) in favor of another party (beneficiary) to guarantee the payment of a specified amount or the fulfillment of an obligation, in case the client fails to comply with the contractual terms or established conditions. The bank guarantee acts as a type of financial insurance policy, providing protection to the parties involved in the transaction.
How bank guarantees work?
Bank guarantees are governed by international rules, such as the rules of the International Chamber of Commerce (ICC), particularly the Uniform Rules for Demand Guarantees (URDG 758). These rules establish the standards and procedures for the issuance, presentation of payment claims, and resolution of disputes related to bank guarantees.
Practical example of a bank guarantee in the transport of goods
Imagine a situation where a company A, the sender, wants to send a shipment of goods to company B, the beneficiary. Company B requests a bank guarantee to ensure that company A fulfills the terms and conditions of the commercial agreement.
Benefits of bank guarantees
Credit Glorious and bank guarantees: