A bank guarantee is a commitment by a bank to pay a beneficiary if its customer fails to meet an obligation. It is widely used in tenders, contracts and trade.
This guide explains the types and uses of bank guarantees.
What is Bank Guarantee?
There are two broad types: a financial guarantee (assuring payment of money) and a performance guarantee (assuring completion of a contract or service). If the applicant defaults, the beneficiary can invoke the guarantee and the bank pays.
Businesses often need bank guarantees to bid on government tenders.
| Financial guarantee | Assures a monetary obligation |
|---|---|
| Performance guarantee | Assures contract performance |
| Common use | Tenders, contracts, trade |
| Backed by | The issuing bank's credit |
Frequently asked questions
What is the difference between a bank guarantee and a letter of credit?
An LC is a primary payment mechanism in trade; a bank guarantee is a fallback invoked only if the applicant defaults.
Why do tenders ask for a bank guarantee?
To ensure the bidder is serious and will perform; the guarantee can be invoked if they default.