​A Bank Guarantee is a promise by a bank or financial institution that the bank will make good the loss if a particular borrower fails to meet its obligations. A bank guarantee means that a financial institution ensures that a borrower's obligations will be met. In other words: If the debtor is unable to pay his debts, the bank will pay for them. A bank guarantee enables the customer or debtor to purchase goods, buy equipment or take out a loan. Bank Guarantees come in two swift messages (MT799 and MT760)

Swift MT799 is a pre advise message between the sending bank and the receiving bank while the Swift MT760 is the Bank Guarantee. Banks cannot send a swift MT760 without first sending a swift MT799. A Bank Guarantee works similarly to a line of credit, except that a line of credit can be drawn down by the bank's customer at will. A Bank Guarantee is called only if the customer fails to pay its supplier an agreed amount. U.S. credit institutions are prohibited from assuming guarantee obligations, so a standby letter of credit is required for most international transactions.

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Types of Bank Guarantees

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• A payment bond assures the seller that the purchase price will be paid on a specified date.
•  An advance payment guarantee serves as security for the repayment of the buyer's advance payment if the seller fails to deliver the contracted goods.
• A performance bond serves as security for the costs incurred by the buyer if the services or goods are not delivered as contracted.
• A loan security bond that serves as collateral for the repayment of a loan.

For example, A Company is seeking a loan funding from an investor in the tune of $50M to finance a project. The Investor requires the company or individual to post a bank guarantee to cover for the full amount given to them. The Borrower asks Capital Bank Leasing 12 Limited to provide a Bank Guarantee. After consultations and due diligence, Capital Bank Leasing 12 Limited provides the required Bank guarantee which will serve as a collateral for the loan and will also cover for the full loan tenure. The Borrowing company gets funded by the investor.​

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What are the uses of a Bank Guarantee?

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• When large companies purchase from small vendors, they usually require the vendors to provide a bank guarantee before offering such business opportunities.
• It is mainly used when buying and selling goods on credit, assuring the seller of payment by the bank in case of buyer default.
• Helps in certifying the credibility of individuals, which in turn enables them to obtain loans and also help in business activities.​

Although a bank guarantee is of great benefit to the applicant, the bank should only provide the guarantee if it is satisfied of the financial stability of the applicant/business. The risk associated with providing such a guarantee must be thoroughly analysed by the bank.

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Pros and Cons

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• Bank guarantee reduces the financial risk of the business transaction.
• Because of the low risk, it encourages the seller/beneficiary to expand their business on a credit basis.
• When banks verify and certify the financial stability of the company, its credibility increases, which in turn increases business opportunities.​
• Sometimes banks are very strict in assessing the financial situation of the company. This makes the procedure complicated and time-consuming.
• Due to the strict assessment by the banks, it is very difficult to obtain a bank guarantee for loss-making enterprises.
• For certain guarantees for high value or high risk businesses, banks require collateral to process the guarantee.​​​

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