Are you a new business looking to acquire assets and need bank guarantee? Perhaps you are a veteran entrepreneur trying to get funding for a business upgrade. In this article, we will discuss the benefits and disadvantages of bank guarantee as a means of payment.
First things first – what is a bank guarantee?
A bank guarantee is an assurance from a bank, which promises to meet a debtor’s financial obligations in case of defaulting payment. Unlike a documentary letter of credit that protects their seller’s interest, BG serves to protect both parties in transactions against breach of contract.
What do you need it for?
In many cases, there are times when your existing finances aren’t enough for closing a deal. You will need a bank’s backing especially if you’re contending with big companies on project bidding. A bank guarantee is a way to provide the necessary assurance before a company will approve your bid.
This is also vital especially when companies want to protect themselves against project abandonment due to insufficient funds.
Bank guarantee benefits
BG includes reduction of payment default risk, enhanced business opportunities, and waiving of initial financial commitment. Other benefits include boosted brand credibility, less capital cost, and less documentation.
Lessen the risk of default. Bank guarantee offers sellersenough assurance of payment after a deal’s end. BG reduces likely financial losses that can happen in case of a default.
No initial financial commitment. When using BG, you don’t need to make any advanced payment to the seller. It prevents you from fake sellers. It’s also a payment instrument where you can defer payment to your advantage.
Betterbusiness opportunities. Proving that your bank supports you opens up more business opportunities, letting you earn suppliers’ trust within and outside your country.
Increased brand credibility. A letter of guarantee from your bank is solid evidence of financial strength, which will earn you better credibility. Businesses hate wasting time with insolvent companies but are ready to work with credible buyers at all costs.
Fewerrequirements. Bank guarantee, especially offered by providers like DBS lets you submit a request within 5 minutes with rapid results. Banks will simply look at your transaction details and financial strength. Note that the bank doesn’t guarantee payment for any deal if you are not creditworthy.
Bank guarantee disadvantages
You’ll find a few disadvantages with bank guarantee since banks put up strict measures to safeguard you against losses.
If you’re not creditworthy, applying for a guarantee from your bank is a waste of time. This means bank guarantee is not within every business’s reach but only for few financially stable companies. Issuing banks may also demand collateral, which can make it inaccessible to some small businesses.BG is also not for business transactions with low margin profit. While it costs little to acquire BG, you may lose a chunk of your profit to the bank.
Several reasons may prompt demand for BG. If you’re unsure of your financial strength, you must assess your business first or consult with an expert before proceeding. When looking for a good letter of guarantee, it’s best to acquire it from a reliable provider like DBS. There you have it, now you have basic knowledge of bank guarantee. Best of luck!