Businesses need regular cash flow for its day to day running, growth, and expansion. It is not always possible for a business owner to find the funds through their efforts alone.
Businesses need considerable funds to make deals with different vendors and other suppliers. Bank and corporate guarantees are two types of guarantees that can ensure fund availability for businesses.
- A bank guarantee is a financial instrument issued by a bank or financial institution that ensures the fulfillment of a party’s financial obligations to a beneficiary should the party fail to meet those obligations; a corporate guarantee is a commitment made by a parent company or an affiliate to fulfill the obligations of a subsidiary or another affiliated company.
- Bank guarantees involve a third-party financial institution as the guarantor, while corporate guarantees involve a company within the same corporate group or structure as the guarantor.
- Both bank guarantees and corporate guarantees provide assurances to beneficiaries. Still, bank guarantees rely on the creditworthiness of a financial institution, while corporate guarantees depend on the creditworthiness of the parent or affiliated company.
Bank Guarantee vs Corporate Guarantee
Bank Guarantees are used in international trade and business transactions to provide assurance to buyers and sellers that their financial obligations will be met. Corporate Guarantees are used to provide financial security in situations such as loan agreements or contracts for goods and services.
A Bank Guarantee is an assurance provided by a lending institution that the liabilities of a borrower will be paid back on time. It offers the lender the surety that the bank will pay for their client if the borrowers fail to clear the debt.
A corporate guarantee is a contract between a corporate institution or individual and a borrower. The three parties involved in the case of a corporate guarantee are the lending party, the borrower, and the individual who agrees to repay the loan if the debtor defaults.
|Parameter of Comparison||Bank Guarantee||Corporate Guarantee|
|Nature||A bank guarantee is an assurance the bank provides to the lender that it will repay when the borrower fails to make it.||A corporate guarantee is a contract between a company, a corporate institution, or an individual and a borrower.|
|Payment||The bank must make the payment when the customer fails to make the payment.||When the customer fails to make the payment, the guarantor must make the payment.|
|Involved parties||Bank, the customer, and the beneficiary are the three parties involved in the bank guarantee.||The three parties involved are the lending party, the borrower, and the guarantor.|
|Risk||The customer needs to assume the primary threat in the bank guarantee.||The guarantor has the responsibility for a corporate guarantee|
|Suitability||Suitable for businesses as well as personal dealings.||For businesses to lend money from banks and other financial entities.|
What is Bank Guarantee?
A Bank Guarantee is an assurance provided by a lending institution that the liabilities of a borrower will be paid back on time. It offers the lender the surety that the bank will pay for their client if the borrower fails to clear the debt.
The bank guarantee is a method for a customer or borrower to draw a loan or acquire goods or equipment.
With a bank guarantee, a company can buy goods or equipment for development and further functioning, which cannot happen otherwise. Generally, two types of bank guarantees are available.
In a direct bank guarantee, banks issue contracts directly to the beneficiary for both International and domestic businesses. Explicit guarantees are given only in cases where the bank’s security does not depend on the commitment’s status, validity, or implemental ability.
Bank guarantees are widely used in overseas transactions because of their easily adaptable features with international legal systems.
Indirect guarantees are most common in export businesses, where most public bodies or government agencies receive the deposit. In the direct type of bank guarantee, a second bank, mainly an overseas bank, is used, which has a branch in the beneficiary country.
Payment guarantees, advance payment guarantees, credit security bonds, rental guarantees, performance bonds, warranty bonds, etc., are the various bank guarantees.
Bank guarantees protect the third party from financial losses and is used extensively in personal and business transactions. When big companies purchase small-scale business owners, bank guarantee certificates are essential for marketing.
A bank guarantee can minimize the risk involved in the financial exchange and may support the sellers in developing their businesses. The fees demanded by the banks are comparatively less, which can be affordable for small vendors.
The process of the analysis and certification from the bank to provide the bank guarantee can increase the business chances for the vendor.
What is Corporate Guarantee?
A corporate guarantee is a type of contract between a company or corporate institution, an individual, and a borrower. In the security, the guarantor is responsible for the borrower’s liabilities.
The three parties involved in the case of a corporate guarantee are the lending party, the borrower, and the individual who agrees to repay the loan if the debtor defaults.
The data required to involve in a corporate guarantee are the name of the debtor, the name and contact information of the person who is providing the contract, the information about the lender, the statement about the guarantee limit, and the signature of the witness.
Corporate guarantees are of two types: limited warranty and unlimited guarantee.
In an unlimited corporate guarantee, the guarantor’s liability is complete, and they should pay the whole amount if the debtor defaults.
Corporate guarantees are prominent in business dealings when the need to receive and create credit arises. Most of these guarantees are for banks and other similar financial entities.
Main Differences Between Bank Guarantees and Corporate Guarantees
- The main difference between a bank guarantee and a corporate guarantee is that a bank guarantee and the bank assures repayment in defaults. Still, the guarantor is responsible for default repayment in a corporate guarantee.
- Bank guarantees can be used for personal and business purposes, and corporate security is mainly used for business transactions.
- The bank, lender, and borrower are the three parties involved in a bank guarantee, whereas the guarantor, lender, and borrower are the three parties involved in a corporate guarantee.
- A bank guarantee is more straightforward than a corporate guarantee.
- There are straight and subsidiary types of bank guarantees. Limited and unlimited are the two varieties of corporate guarantees.
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.