Bank guarantee

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12 July 2013 Dear Experts,

What is bank guarantee ?

What are different types of BGs?

Rajat Poddar

Rajat Poddar (Expert)
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12 July 2013
A guarantee from a lending institution ensuring that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it. its types are...

Tender Guarantee (also called Bid Bond)

This is usually issued for an amount equal to between 1 and 2 percent of the contract value. It gives the employer compensation for additional costs if the party submitting the tender does not take up the contract and it must be awarded to another party.

Performance Guarantee

Normally issued for an amount equal to between 5 and 10 percent of the contact value, this guarantee assures payment to the employer in the event that the contractor fails to fulfil contract obligations.

Advance Payment Guarantee

This enables the employer to get a refund of advance payments made in the event of default by the contractor. It is issued for the full amount of the advance payment, but may contain reduction clauses, which enable a reduction in the maximum amount upon evidence of progressive performance.

Retention Money Guarantee

Most major projects call for stage payments as work progresses. Often the employer retains a percentage of the payment (retention money), as cover for any hidden defects in the completed work. A retention money guarantee allows for immediate release of retention money to the contractor. The employer can get a refund of retention money released, in the event of default by the contractor.

Payment Guarantee

This is used as security for payment obligations. It is also referred to as a Standby Letter of Credit.

Facility Guarantee

This is normally not trade related. Its purpose is to provide security to another bank to advance money to an individual or company. It is often used when a company does not have any credit record and wishes to expand offshore.

Maintenance Guarantee

This ensures that the contactor does not abandon the contract after completion of the construction phase, but continues to honour any maintenance obligations as per the original agreement.

Customs Guarantee

Contractors often need to import equipment temporarily to carry out a contract. Import duty would normally be payable, but the customs authorities will grant exemption if the contractor undertakes to re-export the equipment on completion of the contract. The contractor then has to provide the customs authority with this guarantee, which prevents the contractor from selling the goods instead of re-exporting them.

Shipping Guarantee

This enables the buyer to obtain release of the goods from the carrier, despite the bills of lading being lost or delayed.