A bank guarantee is crucial to the growth of a business, as it offers financial flexibility and grants the client or debtor the ability to expand, even when the books of the individual or company may technically be mired in red. Bank guarantees can come with hard-line expiry dates or be considerably more flexible and open-ended, depending on the terms and conditions.

As an illustration, a construction company may want to invest in advanced building materials, such as super repellent job site materials, but the provider of those materials, who can often be based overseas, requires a bank guarantee before they can begin the expensive process of transporting the goods. With the promise from a reputable bank that those funds will be covered, either on arrival or through a payment scheme that the bank is on the hook for, the construction company will receive what it needs and the business can prosper. To the company receiving the bank guarantee, the risks are not severe. Your reputation may be at stake with the financial institution, and in certain cases they can go after the business’ assets, but it is the bank, that carries all the economic risk. The provider of the product or goods to the business, throughout it all, enjoys near complete peace of mind on the deal.

In summary, if the payment is made by the business to the lender, the bank need not pay. At the completion of the successful bank guarantee, the bank will take a commission, and the business will reap the benefits of its investment.