A bank guarantee is a type of legal assurance whereby an issuing bank ensures the beneficiary that the liabilities of the buyer (applicant) will be fulfilled by the bank in case the buyer fails. To put it simply, in a BG, the guaranteeing bank performs due diligence on the behalf of its applicant and offers payment security to the beneficiary within specified terms & conditions under a contract. Bank guarantee is one of the most used global trade finance instruments among importers & exporters to avoid the risk of payment. The issuing bank promises to reimburse the losses to the beneficiary in the event of the buyer’s default. The involvement of a legal third party ie. a Bank or a Financial Institution provides peace of mind to the beneficiary regarding an on-time payment while also establishing the buyer’s credibility to pay in foreign trade transactions. Types of Bank Guarantee A Bank guarantee is issued by a legal institution for a specific amount and a predetermined period by both the parties ie. seller and buyer. It eliminates the risk of non-payment & non-performance under a global trade transaction.
Originally Posted: https://www.axioscreditbank.com/blogs/know-the-different-types-of-bank-guarantee
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