Bank Guarantee

Bank Guarantee
—Letter of Guarantee (BG)

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A Bank Guarantee is a negotiable financial debt instrument made by a Guarantor Bank on behalf of the applicant to mitigate risk on behalf of the Beneficiary party. It may be used to assist in trade finance, international trade, domestic trade, and various other types of contracts where the backdrop of a vetting third-party (the issuing bank) could be used.

When a bank issues a Letter of Guarantee to a Beneficiary bank it looks at the credit worthiness of the applicant, not the transaction at large. Thus the ability to acquire a financial instrument like a Bank Guarantee largely is based on the relationship it has with its client.

The Bank Guarantee is very similar to that of a Letter of Credit in that it guarantees payment on behalf of its client to the Beneficiary. However, a Letter of Guarantee is usually used in the event there is default. If for instance a purchaser of goods issues a Bank Guarantee to the seller of goods and if after delivery payment were not made for some or all of the contracted amount, the Bank Guarantee acts like a draft or check allowing the Beneficiary to cash it in.

A Letter of Credit can operate the same way, but usually is used in the process of making trade. For instance, after the goods are delivered at port and customs, the Beneficiary then presents the necessary paperwork showing all procedures have been followed and services rendered and now payment will be affected through the Letter of Credit.

The Bank Guarantee more often than not is used as a back up, where the Letter of Credit, such as a Standby Letter of Credit, is used for procedural payment of services rendered.

Both financial instruments enable contracts between two parties to move easier and enable relationships overseas or with parties not familiar with each other to proceed. The credibility of the debtor party is determined by the value and rating of the debt instrument it issues. In other words, it is of more consolation to a Beneficiary to receive a Bank Guarantee from a top rated bank, such as HSBC, than a domestic credit union. In this regard, rating agencies play a part in the value of Letters of Guarantee and Letters of Credit issued to promote healthy trade and finance.

Most top financial institutions have no problem issuing Bank Guarantees to clients of theirs with high credit worthiness, lots of assets, and an extensive banking history with them. However, in today’s market place many healthy and even experienced companies lack the credit worthiness and wherewithal to meet a top rated bank’s requirements.

As a part of the suite of the fee based Credit Enhancement financial services that Balboa Trade facilitates, there are a variety of formats and delivery methods available for a Bank Guarantee and a Letter of Guarantee. These are primarily made available with the setup of domestic and foreign bank accounts as well as foreign private trust accounts. Our clients can enhance their credit profile by joint venturing with the service providers and asset holder relationships Balboa Trade arranges.

Cash accounts for the issuance of the Bank Guarantee are set up and prepaid for terms of 12 months or longer as needed. Please visit our Procedures page for more information on how to utilize this financial solution. Balboa Trade is interested in the long term success of our client’s several transactions. We work hard to ensure satisfaction. Please inquire at our website Contact page so we can begin the application process and work towards your success.