Bank Guarantee - Meaning, Uses, Types, And Advantages
While doing business in the UAE, you need to ensure that the trade deals and/or the commercial engagements must have minimal risk. For this purpose, you need to intelligently take advantage of the power of bank guarantees. A bank guarantee, for example an SBLC bank guarantee, is a financial instrument issued by the bank to its particular customers that ascertains financial cover to losses in the form of a legal contractual obligation.
Bank Guarantee Usage
There are some prominent uses of bank guarantees that you should know in order to understand the different intricate deals of financial transactions in commercial project or in processing a trade deal. When there are contracts in which large corporate entities purchase goods or services from smaller vendors, the bank guarantee documents assure a flawless processing of the whole deal providing priority to the stakeholders. In any case of default situations pertaining to the buyer, the guarantee assures payment to the seller. Moreover, the bank guarantee is an extremely strong instrument that considerably improves the credibility of the trading partners in the business community and on the global front.
The Various Types of Bank Guarantee
There are two broad categories of bank guarantee that are crucial in a legal framework from a commercial perspective.
- Financial Guarantee – The party has to make some security deposits to the bank in order to receive the guarantee statement or document. The bank assesses the security amount and the validity. The financial commitment is taken into account from the contractor. In case of any sort of financial loss, the seller gets full assurance of getting compensated.
- Performance Guarantee – This centers on the quality of a performance. If there are situations in which the performance is not up-to-the-mark, and there are defaults, the loss of the beneficiary will be transformed into productively beneficial by the bank. The concerned contractor can avoid the loss through terms and conditions of the guarantee.
Advantages of A Bank Guarantee
As you have rightly guessed by now, the financial instrument in the form of a bank guarantee provides you great benefits in the dynamics of a trade deal.
- Any business transaction has various types of financial risk in different stages of processing. The bank guarantee issued by a bank concentrates on reducing the incidence of the risk.
- You can smoothly expand your business in different commercial pockets and international cities including Dubai by utilizing the strength of bank guarantees.
- The low service fees of the guarantees make it lucrative for business operations across a range of domains.
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