Are you interested in growing and developing your business through a bank guarantee, but don’t understand what it is? Our article will break down what it is, and how it can affect you.
What actually is a bank guarantee?
In short, a bank guarantee is an alternative to providing your deposit directly to a supplier. Instead, the bank promises the amount to the supplier. However, this sum is only paid if the opposing party fails to fulfil their obligations under contract.
Essentially, the bank will cover the deposit on your behalf. If you default on your repayments, the bank will cover the loss. However, the guarantee requires security to the bank, in form of cash held on deposit, or through real estate.
If you default on your repayments, the bank will repay the supplier what you owe. However, the bank will take the security you provided them to cover their funds. Repaying your debts on time is important to ensuring your security is safe.
What are the benefits?
Certainly, there are numerous benefits to using a bank guarantee. These include;
- Being able to meet contract obligations to a supplier, whilst having the cash held on deposit in the bank.
- You may receive interest on the deposit held with your bank.
- It may exist for a set period of time, or be permanent.
- It gives the supplier peace of mind that they will receive the money if necessary.
Who can apply for one?
Individuals and banks are both able to apply for bank guarantees. They are not difficult to obtain.
Many banks today, including NAB, Bankwest and Westpac, allow you to file for the guarantee online. Generally, applications include how long the guarantee will last, the beneficiary involved and any details of the agreement.
Is there a difference between a bank guarantee, and a letter of credit?
Yes.
Bank guarantees require a larger commitment from the bank. Whilst the guarantee is often used in real estate contracts or building projects, letter of credits are generally used for international trade agreements.
Example
Company ABC is a small business in the fast food industry. They wish to purchase $2 million of equipment from Company XYZ for renovations. XYZ request a bank guarantee from ABC, to feel more confident about receiving payment from ABC for the shipped equipment.
ABC then request a guarantee from their financial institution. The institution provides the guarantee in writing, which is then sent to XYZ as insurance.
Final thoughts
In conclusion, bank guarantees can be a useful method of securing the growth and development of your business. To find out if a bank guarantee is right for you, a business lawyer may assist in your enquiries.
