What is a bank guarantee? How does it protect foreign trade transactions?
As a foreign trader, every transaction security guarantee needs to pay attention to the security of contract performance, and the bank guarantee (BG) is one of the financial instruments widely used in international trade. Simply put, it is a written guarantee document issued by a bank, promising that if the customer defaults or fails to pay the purchase price, the bank will fulfill its obligations on behalf of the customer.
The core functions of a bank guarantee
- Performance bond: Once the seller delivers the product or service, the buyer can use a bank guarantee to ensure that the project is completed as per the contract.
- Payment guarantee: If the buyer fails security guarantee to pay as per the contract, the bank will pay the compensation amount directly to the seller. This makes me less worried when working with new clients.
- Bid guarantee: In a bidding project, the bidder uses a bank guarantee to demonstrate his sincerity in fulfilling the contract and increase his chances of winning the bid.
The main purpose of bank guarantee
- International trade: ensuring contract fulfillment and preventing payment or delivery failures.
- Engineering Contracting: Performance content curation as an online visibility tool bonds, bid bonds and advance payment bonds are particularly common in large infrastructure projects.
- Equipment procurement: When purchasing large commodities or expensive equipment, using a letter of guarantee can add trust to the transaction.
- Leasing and financing: securing the payment of rent or loans.
According to statistics from the International Chamber of Commerce, more than 200,000 transactions worldwide involve bank guarantees each year (data source: ICC ), which is enough to illustrate its importance in foreign trade.
What types of bank guarantees are there?
Bank guarantees are divided into the how to integrate telemarketing with other marketing strategies to optimize results? following main types based on transaction type and needs, each with specific application scenarios and advantages and disadvantages.
1. Performance Guarantee
- Application scenario: When the seller needs to prove that he can deliver goods or services on time, this type of guarantee can security guarantee effectively enhance the buyer’s trust.
- My own case: During my first phone number th cooperation with a major European customer. The customer was very concerned about whether the goods would be delivered on time. I provided the customer with a performance bond, which successfully dispelled the customer’s concerns and successfully completed the order. The customer also expressed that the cooperation was very pleasant.
- Advantages: Enhance customer trust and reduce the risk of delivery delays.
- Disadvantages: Requires a higher deposit or guarantee fee.
2. Payment Guarantee
- Application scenario: When the buyer needs to guarantee the timely payment of the goods, the bank provides protection for the seller.
- Advantages: If the buyer fails to pay, the bank will reimburse the corresponding amount.
- Disadvantages: The buyer needs to bear the additional guarantee fee.
3. Bid Bond
- Application scenario: In international bidding projects, the buyer requires the bidder to submit a letter of guarantee to prove the authenticity of the bid and the ability to perform the contract.
- Practical advice: If you are involved in security guarantee an international engineering project or large equipment transaction, a bid bond is almost standard.
4. Advance Payment Guarantee
- Application scenario: When the buyer pays the seller an advance payment, he requires an advance payment guarantee to prevent the seller from failing to perform the contract.
- My own case: The terms of cooperation between my previous company and some customers were to pay 30% of the purchase price in advance, so some customers would also ask us to provide an advance payment guarantee.
- Note: When applying for this type of guarantee, the bank usually requires you to provide a certain percentage of deposit, so be sure to plan your cash flow well.
How to apply for a bank guarantee? The process is not complicated, but details determine success or failure!
When I applied for a bank guarantee for the security guarantee first time, it took me two weeks because I didn’t understand the process, and it almost delayed the delivery. So I summarized an efficient process for applying for a bank guarantee based on my experience:
1. Determine the need for a letter of guarantee
According to the transaction contract, clarify the type, amount and term of the bond required. For example, in a project with a European client. I chose a performance bond according to the contract requirements and determined .