Guarantees are commonly used to cover the risk of non-compliance by a contract party to fulfill agreed obligations (e.g. failure to pay or deliver). Guarantees can be used in open account trade as well as a complement to collections and documentary credits.

What is the purpose of guarantee?

A guarantee is a legal promise made by a third party (guarantor) to cover a borrower's debt or other types of liability in case of the borrower's default. The time a default happens varies, depending on the terms agreed upon by the creditor and the borrower.

Why do we use bank guarantee?

Bank guarantee reduces the financial risk involved in the business transaction. Due to low risk, it encourages the seller/beneficiaries to expand their business on a credit basis. Banks generally charge low fees for guarantees, which is beneficial to even small-scale business.