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Know what is a “Bank Guarantee” (BG). There are two types of guarantee. One is direct and another one is indirect.

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simply defining it is a guarantee given

Simply defining, it is a guarantee given by the bank or any other financial institution where it states that, if the person or organization who is taking the money fails to repay the debt, then the bank will cover for the debtor.

purpose
Purpose:
  • The Bank Guarantee (BG) gives the safe platform for the transaction to occur.
  • For example, if any company needs a big amount of equipment in order to boost the economy, then the seller (who is selling the equipment), may ask for the guarantee from the bank before selling any equipment as this transaction will be that of high amount.
types
Types:
  • There are two types of guarantee. One is direct and another one is indirect.
direct
Direct:
  • As the name suggests, it applies to those types of guarantees given by the banks which directly involves the beneficiary.
  • This type is often suitable for cross-border trades were legal system and other liabilities makes it difficult for the transactions to occur. It gives a secure environment.
indirect
Indirect:
  • Indirect type comes into play when the system doesn’t accept foreign banks.
  • In this case, an indirect type of guarantee takes place where a mediator bank, which is a foreign bank whose office is located in the same country as the beneficiary, is taken up as the guarantor.
  • How it helps a business? Sometimes small business owners in order to expand may need to take steps which could involve lots of risks.
on the other hand to boost the economy these

On the other hand, to boost the economy, these steps might be required to more or lesser extent.

  • Hence in these cases, by serving as the guarantor, the bank could ease the process of transition and thus, can have a direct influence on a country’s future.
  • How can one apply for it?
acquiring this type of guarantee requires various

Acquiring this type of guarantee requires various steps and banks do check upon various factors before issuing a guarantee.

  • These checked up elements may include and not limited to: trading history, credit history, liquidity etc.
  • In simple words, the person or the organization needs to show its worth before applying for the guarantee.
it should also be mentioned that bank requires

It should also be mentioned that bank requires knowing how long does the guarantee is needed for, what amount is needed, for how long the amount is needed, beneficiary details along with any other information that bank may state as important.

  • Only after giving this information, the bank may decide to give a guarantee.
  • For examples: Tender guarantee, advance payment guarantee, performance guarantee are some type of guarantees.