As the name suggests, Bank Guarantee is the guarantee provided by a bank or financial institution to the creditor for the borrower. This is a contract between three parties – Bank, Borrower and Lender. When a lender provides a loan or products to a borrower, the bank or financial institution gives surety to the lender that, if the borrower fails to pay the debt, the bank will bear the loss.
Process of Bank Guarantee
A bank guarantee agreement usually takes place between large and small scale businesses. The large scale companies request for a bank guarantee while collaborating with a small scale business. The bank guarantee usually takes place in infrastructure, real estate companies.
For example, If a restaurant owner needs some kitchen equipment, then the equipment seller requests for a bank guarantee from the restaurant owner before shipping the goods as they don’t want to risk their business in case of any loss. The restaurant owner will visit the bank and request for a bank guarantee. Banks don’t provide such assurance without background verification. They check the financial stability, creditworthiness along with other eligibility criteria before providing the guarantee.
Once the verification is completed after reviewing the documents submitted by the borrower (restaurant owner in our case), the bank provides the guarantee which can be used by the seller.
Check: Why your business loan was rejected and what to do next
Types of Bank Guarantee
There are different types of bank guarantees depending upon the security the borrower requests for.
- Loan Guarantee – A guarantee provided by the bank or financial institution to pay the debt if the borrower goes default.
- Advance Payment Guarantee – The seller will be given an advance payment for the product or service and fails to fulfill the requirement, then the buyer will get a refund of the amount paid.
- Performance Guarantee – If the beneficiary of the guarantee does not receive the required work as promised, the bank will pay compensation.
- Deferred Payment Guarantee – It is a guarantee provided by the bank to the seller to clear the deferred installment payment. For instance, if the buyer has agreed to pay for machinery in 10 installments and fails to pay the installment at that particular time, then the bank will make the payment as per the bank guarantee agreement.
- Shipping Guarantee – If the buyer does not pay for the shipped goods, the bank will save the shipping company from the loss by paying on behalf of the buyer.
Also, check: Mistakes you should avoid while applying for a Business Loan
How to get Bank Guarantee in UAE?
There are several banks in the UAE that support businesses to run smoothly in terms of finances by providing a bank guarantee. Provides different types of bank guarantee depending upon the business requirement
- CBD
- DIB
- Mashreq
- HSBC
Documents required for Bank Guarantee in the UAE
- Emirates ID
- Passport and Residence Visa
- Trade Licence
- Certificate of Commercial Registration
- Freezone Certificate of Incorporation
- Memorandum of Association
- Partnership Agreement
- Power of Attorney or Board Resolution
- Address Proofs (Utility Bills)
- Beneficiary Details
- Company Profile
- Audited financial statements
Letter of Credit vs Bank Guarantee
There is always a big misconception between the Letter of Credit and Bank Guarantee. More or less the working of the Letter of Credit and Bank Guarantee is the same but these are two different services provided by the banks or financial institutions.
Bank guarantee is a surety provided by the banks to clear the loan in case of the borrower defaults. Letter of Credit is the credit provided by the bank to clear the loan without waiting for the borrower to go default.
About the author
Nikitha is a Senior Analyst at MyMoneySouq.com. She has been writing about personal finance, credit cards, mortgage, and other personal finance products in the UAE. Her work on Mortgage loans has been featured by the GulfNews and other popular Financial Blogs in the UAE.
