In the matters of International trading it is advisable and a trustworthy to pursue the transaction with the help of a financial trading tool. Even in the event where a business of smaller entity trades with a bigger entity it is advisable to go ahead with the help of a financial tool named Bank Guarantee.
As understood from the name it means when the bank stands a guarantor on the behalf of the applicant. Usually in matters of a company taking up a project overseas it is not feasible for the government there to access the credit worthiness of the vendor. To avoid this hassle the applicant will place a guarantee sought from his bank acclaiming the trust factor and guaranteeing the payment on his behalf.
It does not necessarily cover the whole amount rather it is usually for a percentage of actual amount of sum needed for the contract to be fulfilled. In layman’s language this is also known as a limit issued by the bank. The banks have their own procedure to assess the credit value of the applicant after which the guarantee is provided.
These are further classified into two categories namely a Financial Bank Guarantee and a Performance bank Guarantee. In case of the letter the bank guarantees the satisfactory performance and capacity of the applicant to complete the given contract.
This financial instrument is usually used as a collateral for business opportunities or loans. It is also traded off from one party to another. This is undoubtedly one of the most useful instruments in trading but can also prove to be tedious in case you do not understand the complexity of its process and procedure.