Understanding Bank Guarantees: A Comprehensive Guide

If you are looking to do international transactions for your Indonesia-based business, you have several available payment options to choose from. However, they are not without their risk – for example, your contracts and transactions may fail to be held up for many reasons, resulting in non-payments. To facilitate these international operations and as a safety net, you may use a bank guarantee. Especially popular outside of the United States, learn what it is and how it could assist your business operations.

A bank guarantee acts as a backstop to ensure that financial obligations in a transaction will be fulfilled. Even if one of the parties involved in it fails to do so, commitments of payment and goods/services delivery will still be honored. It is a promise made by a financial lending institution to cover unfulfilled contracts should their borrower defaults.

This way, by paying a certain fee, your business can be covered should the worst happen. If your business has a client that fails to settle their debt or deliver what they promise, you would still receive what you are owed. Thus, your operations can still be run and be expanded with minimum risk.

Bank guarantees come in various forms, each with their own unique purpose. While every bank may offer different guarantees, here are some of the most common kinds and why they exist:

A performance guarantee is a collateral to ensure that the services or goods delivered by the seller meet the minimum level/standard described in the contract. When their deliveries do not meet this standard, the buyer or the client is guaranteed compensation for any loss caused by the sub-par deliveries.

In a bid bond guarantee, the bond owner is entitled to a compensation if the bidder does not start a project that has been agreed on. The purpose is to provide a guarantee to the bond owner that the bidder will do and finish work as agreed if they are selected.

This type of guarantee also acts as a collateral to ensure that the buyer/client’s advance payment would be reimbursed should the seller fail to deliver their end of the bargain per the agreed contract.

Based on the aforementioned guarantees, there are different types of them that cover a wide range of warranties. Your business may or may not need one of them to help its operations. Choosing the right type of guarantee for it could be daunting. However, there are five simple steps to take that can assist:

You know your business and what services and goods that it provides. For example, you are in the business of goods procurements for your clients, and you are enlisting the help of suppliers. In this case, you may need a non-financial guarantee to protect your business against contract non-compliance from them. This will make you be better protected, even if you have not pre-established a strong business relationship with the suppliers.

Once you are done with the analysis of your business’ needs and have noted those needs down, get to the next step. Contact your local bank and explain briefly about your note. Check what products that they have that can provide you a warranty should an unexpected situation arises.

During the discussion with your bank, they may offer you an appropriate existing guarantee or other specific services based on what you are stating. While the specific details of other services may also vary, these will serve a similar purpose: to optimise your working capital while limiting risk exposure to your business at the same time. This in turn would help you grow it faster and in an easier way.

If you are still unsure on which guarantees or services would bring the most benefit for your business, do not hesitate to inquire further. Your bank may be able to bring you tailored solutions. Some of these may include letter of credits, especially for markets where buyers and sellers may feel less comfortable about bank guarantees. These solutions would still provide the same goal, which is to give you a certain warranty against non-performance.

Other similar solutions include forfaiting, where you can obtain cash without waiting for the payment due date, or receivables finance, which helps you access most of your invoice values on a real-time basis. All of these help your business gets the working capital it needs with minimal risk. Decide which solution is the best for it.

Once a decision has been made, go through your bank’s terms and conditions. If these are satisfactory to you and your business, you can start with the next step: open an account with them. The bank will help take you through the next processes and ask for any other information that they may need from you.

Since bank guarantees help provide security for your business, it is important to learn about. After looking at its definition and how it assists in covering your business against potential losses, the next step is to decide which guarantees would be the most appropriate for your business. Reach out to your bank and enlist their help to ensure the growth of your business.