A bank guarantee and a letter of credit ensures that a transaction proceeds as planned, while bank guarantees reduce the loss if the transaction doesn't go as planned. A Bank guarantee is an obligation taken on by a bank to make a payment once certain criteria are met. Once these terms are completed and confirmed, the bank will transfer the funds. This ensures the payment will be made as long as the services are performed. A bank guarantee, like a line of credit, guarantees a sum of money to a beneficiary. The instruments are designed to reduce the risk taken by each party.
Step 1 - Applicant and beneficiary enter into a contract and agree that a Bank Guarantee is required
Step 2 - Applicant approaches The Bank(issuing bank) to issue a Bank Guarantee in favour of the beneficiary
Step 3 - Bank issues the Bank Guarantee to the beneficiary’s