What is a Bank payment guarantee and who uses it?

What is a Bank payment guarantee and who uses it?

From the rubric "Financial literacy”

It often happens that a Bank guarantee is used by the entrepreneurs. For example, a producer of vegetable oil wants to buy rapeseed. The manufacturer will have money only after it releases its products for sale. Therefore, the manufacturer asks the supplier of raw materials to grant him a delay in payment. In order to get the supplier's consent for the delivery of raw materials, the manufacturer asks the Bank for a guarantee. Under the terms of the guarantee, the Bank will pay the manufacturer's debt if it does not transfer money for raw materials within the agreed period.  

Bank payment guarantee is a financial instrument that ensures mutual compliance of the parties with the terms of agreement and protects against risks. In simple words, this is a document according to which all parties to the contract will fulfill their promises.

In the process of execution of this document, there are three subjects: 

A guarantor is a person who issues guarantees: a banking institution or financial institution that assumes part of the financial responsibility when the relevant conditions occur. 

A principal (buyer, importer) is a performer, according to a trade contract, who may remain a debtor to the customer when risks occur. 

Beneficiary (seller, exporter) is a customer in a trade transaction whose interests are exposed to risk and protected by a Bank guarantee.


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