Articles
Difference Between A Performance Guaranty And A Financial Guaranty
by Kenneth Jackson Banking & Financial ServicesWhat Is A Bank Guarantee?
A bank guarantee (BG) is a legal document/contract issued by a bank or financial institution where the issuing bank or lender assures the seller that the liabilities of the borrower will be met on-time. In the event, if the debtor fails to settle a debt, the lender will reimburse the full or remaining amount. In simple words, a bank guarantee or BG is a promise made by the lender to the seller on behalf of its debtor that the contractual obligations will be fulfilled by the borrower as per the terms & conditions of the contract. But if the buyer defaults in paying or performing BG agreement, the lender will take the responsibility to pay the seller.
These types of guarantees are used in international as well as domestic markets as a frequent trade finance instrument to protect sellers against the associated risks.
Example of Bank Guarantee
An exporter called ABC Ltd requests a bank guarantee from an importer called XYZ ltd. On notifying, XYZ ltd approaches its bank to serve a bank guarantee on behalf of the exporter. If the bank gets satisfied with the authenticity of the documents provided by the imports and exporters, it will issue a bank guarantee and act as an undertaking on behalf of its applicant. The further agreement ensures that the beneficiary would be paid on-time with the specified amount, in case of its borrower’s default.
If you are a global trader and looking for a bank guarantee service provider, you need to know the key differences between a financial BG and a performance BG. Let’s have a look:
What Is A Financial Bank Guarantee?
- In a financial bank guarantee, the issuing bank assures the seller that the buyer is capable of paying the debts owed to him.
- In any case, if the buyer is unable, unwilling, or fails to pay the borrowed amount to the seller for the delivered goods & services, the bank will take the financial burden on itself and reimburse the amount to the beneficiary.
- Upon the issuance of a BG, the bank or FI charges a small fee from the buyer.
- In simple words, if the buyer does not complete his financial obligations mentioned in the BG agreement, the bank will cover the amount.
- These types of guarantees are generally issued in place of security deposits. And there can be a contract requiring a financial commitment from the buyer.
- In such cases, the buyer can provide a BG to the seller instead of depositing the money using which the seller can be compensated in case of any failure by the buyer.
What Is A Performance Bank Guarantee?
- Under a performance BG, the bank guarantee service provider assures the seller that the money will be compensated on-time in case there is any delay in delivering the performance by the buyer.
- In simple words, a performance bank guarantee is issued with a promise by the lender regarding completing a particular task in the hands of the applicant. In case, there is a default in the performance/non-performance or delay in performance of a contract, the beneficiary’s loss will be reimbursed by the bank.
- For example, Mr. A enters into a contract with Mr. B for the completion of a certain project on time while a BG is issued in the support of the contract. In case, if Mr. A is unable to complete the project on-time, then Mr. B will be compensated by the issuing bank.
Now you know that both of these types of bank guarantee protects the beneficiary against non-payment and non-fulfillment at the hands of the applicant. It is an assurance from the lending institution that it will undertake the risk involved in a transaction.
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About Kenneth Jackson 
Banking & Financial Services
3 connections, 1 recommendations, 38 honor points.Joined APSense since, December 3rd, 2020, From London, United Kingdom.
Created on Apr 1st 2021 06:46. Viewed 323 times.
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