A bank guarantee is a guarantee provided by a contracting party’s bank, usually a buyer, to the seller, guaranteeing payment to the seller.
- often businesses want to undertake trade with other businesses but in order to do so need to agree to trade on terms allowing them time to make payment in order that they can sell goods on for profit and cash with which they can pay for their supplies;
- however, the supplier may not be comfortable to supply at the amount required by the buyer or on the terms the buyer seeks and require cash on delivery or shorter credit terms, which would cause cash-flow problems for the buyer;
- to alleviate the fears of the seller and secure their preferred terms the buyer may offer, or the seller may require, a bank guarantee. This is a guarantee from the buyers bank to the supplier whereby the bank is obliged to pay the supplier if the buyer should not.
The bank may be prepared to do this because it may have other collateral secured over the assets of the buyer, or because it has a cash deposit from the buyer, and so it can meet the obligations to the seller, should the guarantee be called upon.
If you need assistance on bank guarantees, call the banking and finance team at Francis Wilks & Jones for expert advice.
