Bank guarantees are credit commitments made with customers in order to make international exchanges easier and successful for both importers and exporters.
Through bank guarantees financial institutions that function as guarantors, commit to pay a determined amount to the exporter upon reception of specific documentation. This documentation has to show that the exporter has fulfilled the contract with the importer in the way it was convened. Bank guarantees certify that the seller of the goods will receive payment from the bank in the absence of the importer.
Bank guarantees allow the seller to receive the nominal payment for the merchandise from the bank in the absence of the buyer.
With regard to validity, bank guarantees are not indefinite and they should always be used within their period of validity in a clear and unambiguous way. We say the bank guarantee is no longer valid when the guaranteed obligation has expired and the beneficiary has not requested the guarantee. It is understood that the obligation has been fulfilled and therefore the bank can automatically cancel their commitment.
Depending of their purpose and their uses bank guarantees are categorized differently.
There is a period before the bank guarantees comes to being. Banks can decide to grant the credit and reserves the funds and in the meantime, it assesses the proposal.
Technical: they are necessary for companies or organizations with a commitment to public service or some international body.
Economic or financial guarantees: they are the most common because through them the bank undertakes the payment of the obligations of the customer to third parties if the latter fails to comply with them. These include commercial or financial transactions.
When a bank guarantee is given to an importer, it is used as a guarantee for the compliance of the contract. It means that the importer is protected in case the exporter does not provide the quality and quantity of the goods it promised in the contract. In this case, the bank guarantee will make protect the importer from giving payment to the exporter.
Bank guarantees are also positive for exporters because of the same reasons. Let us say that upon arrival, the importer does not have the funds to pay for the goods he or she had agreed to pay. Under this scenario the bank guarantee will make sure the exporter is compensated.
