Bank Guarantee
A lot of times people want to start a business or have some kind of
project that needs financing. Sometimes that financing can be difficult
to come up with if they don’t have a lot of collateral. There is a thing
called a bank guarantee that helps with this.
A bank guarantee is a situation in which a financial institution
promises, or guarantees that the debtor will meet their debt obligation
to other lenders and creditors, and if not, the guaranteeing financial
institution will fulfill it. This helps a potential business owner, or
one that is expanding to have a credit line to get more supplies,
inventory, equipment and whatever it takes to grow or expand a business.
In short, a bank guarantee is a promise to back up and fulfill a debt
or default of another person if they fail to live up to the obligation.
A guarantee must have an enforceable contract signed by the guarantor.
There is a specific guarantee, in which the guarantor's liability to
a particular transaction between the debtor and the bank is limited to a
specific amount, and a .
continuing guarantee of a limited amount, in which the guarantor
guarantees the debtor's liability only to a specified sum and no more.
This limits the guarantor’s own liability. This is the most frequent way
banks go about a bank guarantee.
These guarantees are always a least a little risky, and they are very
similar to having a co-signer. They are the safest when the person
seeking the guarantee has a good and solid business loan proposition and
business plan. However, if the debt goes bad, the guarantor may have to
try to retrieve lost funds via the court system.
There is also another type called a leased bank guarantee in which
the guarantee is leased to a third party for a particular sum of money;
usually a percentage rate with fees can run as high as 15% annually.
In this state of affairs the potential backer will go over the
financial history of the individual looking for the guarantee, and
whenever sanctioned, they will lease a guarantee to that person for a
set time period, like two years or less, and then they will send the
guarantee to the borrower's chief financial institution, and the
issuance bank then becomes a backer for debts obtained by the debtor, up
to the warranted amount.
Because of the unfavorable nature of the conditions of this backing,
it is mostly only used by new and small startup companies that
desperately need financial backing. |
