The Importance of Bank Guarantee in a Growing Business
In contemporary international payment transactions, there takes place frequent use of bank guarantees as collateral payment in commercial transactions. The bank guarantee is usually required when it comes to specific business agreements that require stronger commitment and assurance that all contractual obligations will be implemented exactly as indicated. Knowledge of the use of bank guarantees allows better negotiating position in making business, quicker response to the demands of public calls for tenders and the provision of their own claims. Because of its rapid and efficient implementation, the bank guarantee is one of the most commonly used collateral in international business.
A growing business often comes across a bank guarantee while borrowing goods or money from a lender. Here is how bank guarantee helps the debtor, that is, the owner of the growing business, in the day-to-day operations.The Importance of Bank Guarantee in a Growing Business
The Bank Co-signs the Lending Documents
When you begin a new business or a new job and apply for a loan, you need a guardian/parent to co-sign the loan application. Similarly, when you own a growing business and look for external investment, the lender will ask for a bank guarantee or bank guarantee in which a reliable bank co-signs the loan document.
In case you are unable to meet the deadline, the bank will pay the outstanding amount to the investor for the time. Now the loan will be transferred on to the bank. You will then pay the amount to the bank at usually a higher rate of interest.
Helpful in International Trade & Expansion
The bank guarantee is extremely helpful in case of international expansion schemes. It is harder for the lender to recover the money from an individual living across international borders. To make sure that the debtor does not default, the lender will most likely ask for a bank guarantee and release the funds only after receiving one.
The international expansion schemes help a business scale to uncharted territories in search of a better or larger return on investment.
Acts as a Moderator
Involving a bank in the deal is actually a good idea for both the lender and the debtor. A reputed bank acts as a moderator for the entire deal so that it flows smoothly. As a moderator, the bank tracks the flow of money from the lender to the debtor and all the way back. In case it senses any foul play, it will warn the participants and pull out from the deal immediately.
This way all three parties, that is, the bank, lender, and the debtor, can mitigate risks at a very early stage before things go sour.
It is Not Easy to Get a Bank Guarantee
So, the bank guarantee seems like a really good deal for all the interested parties. However, one must know that it is not exactly easy to secure a bank guarantee from a reputed banking institution. A stark banking and financial record are just two of the key criteria for securing a good bank guarantee. In certain cases, you might have to produce documentation for your entire financial history for the bank to check it for the approval of the guarantee.
Shipping guarantee usually comes hand in hand with a proof of funds to reaffirm the faith of the lender in the deal. The banking institution will have financial and risk analysts to calculate the chances of the debtor defaulting on the promise. A thorough follow-up and fine calculation finally lead to the approval or dismissal of the bank guarantee.
Once approved, the bank will have the debtor’s back in the deal and make sure that the lender gets the money on time. So, essentially a bank guarantee is an assurance that the deal is actually a win-win agreement for all the participants.
Why Use Bank Guarantees in Long-Term Project Contracts?
When it comes to managing the risk and safety of long-term projects, a bank guarantee promises that if the company carrying out the project defaults on any of its loans, the bank will cover the costs or losses. This guarantee work clause increases the confidence of the vendors who need to give large amounts of their products or services, usually on credit, to complete their part of the project.
The Importance of Bank Guarantees
A bank guarantee is essentially a promissory provision on a loan indicating that if the borrower of the loan defaults on repayment, the bank will cover the amount of default. This is a crucial provision to convince multiple companies to work together to complete a long-term project. This guarantee work clause can be essential for allowing a project or venture to move to the next stage. With the backing of the bank, all parties are covered in the worst-case scenario, if payments do not come through.
For example, if a construction company takes on the long-term project of building an office tower, that company needs to hire vendors and subcontractors to complete the project. In this example, the construction company that’s overseeing the project could specialize in framing the office building, but it needs to subcontract with another company to install the thousands of window panes needed to complete the project.
The construction company might not be paid for its work until the end of the project. It needs to hire the window installation company on credit through a loan since the thousands of window panes could cost more than a million dollars. This puts a lot of risk on the window installation company. The project could take longer than anticipated, or it could be scrapped due to a lack of funding from the group paying for the construction of the office building.
Having a bank guarantee in place reduces the risk to the window installation company because it knows that, no matter what happens, it will receive payment.
Bank Guarantee Meaning: A bank guarantee is a promise from a bank or a financial institution that if a particular borrower defaults on a loan, the bank will cover the loss. A bank guarantee allows the customer, or debtor, to acquire goods, purchase equipment or draw down a loan.
NEWS FLASH: Kingrise Finance Limited is a Lease Bank Guarantee provider, BG Provider, Bank Instrument Provider, financial instrument provider, monetizers of bank instruments, international bank guarantee providers, genuine bank instrument providers & top bank guarantee providers.
Bank guarantee is an important financial term that can drive the confidence of investor parties in the business. In simple terms, the bank guarantee ensures that the borrower pays the amount that he/she borrowed on time. In case the borrower is unable to pay the amount, the bank will pay the amount on his/her behalf. This way the lender faces no risk of losing money in the deal.
A bank guarantee acts similarly to a line of credit, except that a line of credit can be drawn upon at will by the bank’s client. A bank guarantee is used only if the client does not pay its vendor an agreed-upon amount. U.S. credit institutions are forbidden from assuming guarantee obligations, and therefore most international transactions require a standby letter of credit.
Types of Bank Guarantees
There are many different types of Bank Guarantee namely:
- A Payment Guarantee assures a seller the purchase price is paid on a set date.
- An Advance Payment Guarantee acts as collateral for reimbursing advance payment from the buyer if the seller does not supply the specified goods per the contract.
- A Performance Bond serves as collateral for the buyer’s costs incurred if services or goods are not provided as agreed in the contract.
- A credit security bond serves as collateral for repaying a loan.
Bank Guarantee Costs & Charges
Generally, BG charges are based on the risk assumed by the bank in each transaction. For example, a financial BG is considered to assume more risk than a performance BG. Hence, the fee for financial BG will be higher than the fee charged for performance BG.
Based on the type of the BG, fees are generally charged on a quarterly basis on the BG value of 0.75% or 0.50% during the BG validity period. Apart from this, the bank may also charge the application processing fee, documentation fee, and handling fee.
In some cases, security is required by the bank from its applicant, which is generally 100% of the BG value. In certain cases, collateral security or cash margin may also be accepted by the issuing bank. But Kingrise Finance Limited offers more flexible terms than banks, our bg sblc cost/charge is 4% of the bg sblc face value and we do not need collateral or personal guarantees from our customers.
Advantages and Disadvantages of Bank Guarantees
Bank guarantee has its own advantages and disadvantages. The advantages are:
- Bank guarantee reduces the financial risk involved in the business transaction.
- Due to low risk, it encourages the seller/beneficiaries to expand their business on a credit basis.
- Banks generally charge low fees for guarantees, which is beneficial to even small-scale business.
- When banks analyse and certify the financial stability of the business, its credibility increases and this, in turn, increase business opportunities.
- Mostly, the guarantee requires fewer documents and is processed quickly by the banks (if all the documents are submitted).
On the flip side, there are some disadvantages such as:
- Sometimes, the banks are so rigid in assessing the financial position of the business. This makes the process complicated and time-consuming.
- With the strict assessment of banks, it is very difficult to obtain a bank guarantee by loss-making entities.
- For certain guarantees involving high-value or high-risk transactions, banks will require collateral security to process the guarantee.
How To Find Genuine Standby Letter of Credit (SBLC) Providers.
1. HISTORY / EXPERIENCE: The best way to know if your sblc provider is real or not is to check how many years they have been in business. For me I will choose a bank instrument provider that has been in business for decades over one that just started a few years ago. Same way I would prefer a medical doctor with 30 years experience over a doctor that has just one or two years experience. History and Experience is everything.
2. Background Check: Run background checks on the company to make sure that they are real.
3. INCORPORATION: Check if it is a legally registered company or fake one. Ask for their incorporation certificate.
URGENT NOTICE: It might interest you to know that there are only 10 genuine sblc providers in the world and Kingrise Finance Limited is number one. Contact us if you want to know the list of genuine sblc providers in the world and we will be glad to share that information with you.
So if you are in the market for SBLC (Standby Letter OF Credit) or Bank Guarantee (BG) then make sure you use a reputable Financial Services Provider with decades of experience like Kingrise Finance Limited, the benefits of following this approach is to give you peace of mind that your interest would be protected and you surely would be getting the best deal.
Uses of Bank Guarantee
- When large companies purchases from small vendors, they generally require the vendors to provide guarantee certificate from banks before providing such business opportunities.
- Predominantly used in the purchase and sale of goods on 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.
Though there are lots of uses from a bank guarantee for the applicant, the bank should process the same only after ensuring the financial stability of the applicant/business. The risk involved in providing such a guarantee must be analyzed thoroughly by the bank. So if you are looking for genuine providers of bank instruments, monetizers of bank instruments, real sblc providers or genuine bank guarantee providers kindly contact Kingrise Finance Limited.
Kingrise Finance Limited was incorporated in Hong Kong on 22-SEP-1999 as a Government Licensed Money Lender with CR No.: 0689078. We are leading providers of Business Loan, SME Loans, Project Financing, Recourse Loan, Non Recourse Loans and Bank Financial Instruments such as Standby Letter of Credit, Bank Guarantee, Performance Guarantee Bond, Tender Bond Guarantee, Advance Payment Guarantee, Bank Comfort Letter, Letters of credit etc.
We have been providing these financial services to our numerous customers all over the world including importers, exporters as well as customers that need credit enhancements or trade finance facilities to execute projects locally or internationally.
Our loan interest rate is just 3% annually and you can get loan financing from us with or without security or collateral. The loan term is up to 30 years with a grace period up to 3 years for those in the construction industry.
Our bank instruments, bg and sblc/sloc are issued from prime banks such as Barclays Bank London, Standard Chartered Bank, HSBC Hong Kong or any rated AAA bank of your choice. All our financial instruments are Cash-Backed and can be used as collateral to secure funding for projects, Discounting, Monetization and Private Placement Programs (PPP).