Bank Guarantee is a useful financial instrument that enables companies to grow their existing business by making a bid on transactions. There are various instruments it can be used which include a bid bond, a performance bond, advanced payment guarantee, a warranty bond, a letter of indemnity, a payment guarantee, a rental guarantee, or a confirmed payment order.
There are two types of bank guarantees:
A Direct Guarantee is a guarantee that a bank offers in favour of the beneficiary. The account holder asks the bank to do so.
An indirect guarantee, as the name suggests is a guarantee that is not directly issued by the bank, however, a second bank provides the guarantee in place of an already issued guarantee. In a case where the second bank faces losses when a claim is done against the guarantee, then the original bank that provided the guarantee compensates the losses.
There are different types of bank Guarantees that are available. These are:
Performance Bond or Contract Bond
This type of bond is commonly used in the real estate industry that provides an assurance that a contractor will complete the project assigned to him.
A Bid Bond is most commonly issued for bidders that are dealing in the construction based projects.
The Warranty Bond denotes that all the defects that are found in a specific project will be taken care off in the period of warranty.
Advance Payment Bond
An Advance Payment Bond is an agreement where an issuer takes the full responsibility for returning an advanced payment to the buyer in case the seller doesn’t pay.
A Payment Guarantee provides the supplier financial security in case the applicant doesn’t pay in time for the goods or services which are supplied.
Letter of Indemnity
Letter of Indemnity is a guarantee stating that all the contractual provisions are taken care off otherwise the reparations will be made.
Rental Guarantees is an assurance of payment to a landlord in a situation where the tenant doesn’t pay the rent.