Let us take an example for better understanding. Your company is interested to work on a governmental project across the border. Now there are several other companies who are interested in this project and all of them have applied for this project. The selection will be made on the basis of the company’s track record and the lowest cost stated as mentioned in the form.
In order to ensure that the project is finished on time, the government keeps a condition that the selected company will have to furnish bank guarantee of one or more banks.
The Bank Guarantee offered by your bank is generally on a specified amount, which is a certain percentage of the total money required for completing the project.
There is a catch here. The bank will not just issue for any company. The bank will carry out its own thorough analysis regarding the financial strength of the company before it agrees to vouch for the company. After all, the bank is also at a risk. If your company defaults, the bank will have to pay the amount.
Different types of Bank Guarantees….
Bank Guarantee is generally classified into two categories:
- Performance Bank Guarantee (PBG): as the name suggests, the bank will act as the guarantor only when it is satisfied that the company will be able to perform to the satisfaction of the government. The PBG has several other varieties.
- Bid-bond guarantee – your company needs a bank guarantee that guarantees that the company has the ability to complete the project on winning the bond. This is known as bid-bond guarantee.
- Advance payment guarantee – your company needs a guarantee in order to buy the materials. Hence it wants the bank to act as its guarantor. This is known as advance payment guarantee.
- Financial bank guarantee: this guarantee is used so that your company will get the required financial commitment like the loan, security deposit.
Apply for Bank Guarantee:
- Bank Guarantee against cash margins – you need to create a Fixed deposit (FD) with the concerned bank and they will confirm the Bank Guarantee in return.
- Bank Guarantee against sanctioned credit limits – you can avail Bank Guarantee against Enterprise credit limits