Bank guarantee

A bank guarantee is a kind of guarantee from a lending organization. The bank guarantee also signifies that the lending institution ensures that the liabilities of a debtor are going to be met. In other words, if the debtor fails to perform the obligation, the bank will cover it. A bank guarantee allows the customer, or debtor, to acquire goods, purchase equipment or draw down a loan. A bank guarantee is a promise from a bank or other lending institution that if a particular borrower defaults, the bank will cover the loss. A bank guarantee is similar to, but not the same as a letter of credit.

Use in trade and project finance

Bank guarantees are widely used in commercial transactions to secure payment or performance obligations. The U.S. International Trade Administration notes that, in export finance, foreign buyers often provide a bank guarantee in the form of an aval, letter of guarantee, or letter of credit.

In international practice, guarantees are also used in construction, infrastructure, and other project-based transactions to support bid, advance-payment, and performance obligations. The International Chamber of Commerce states that demand guarantees secure monetary and performance obligations in a wide array of international and domestic contracts.