A guarantee is a formal assurance or agreement from the third party that they will fulfill certain conditions. If debtors fail to pay the supplier, the bank guarantees to pay a certain amount.
A bank or financial institution provides many services to its customers. It lends loans and guarantees payment to another party.
International trade is an exchange of goods and services available in their country or importing needed or wanted goods and services from another country. To run a business smoothly and to increase economy and business activity Bank encourages its entity and individuals.
Key Takeaways
- A bank guarantee is a commitment by a bank to cover a specific financial obligation on behalf of its client in case the client fails to fulfill the obligation; a solvency certificate is a document issued by a bank, certifying that an individual or company has the financial capacity to fulfill specific financial obligations.
- Bank guarantees are used to secure performance or payment obligations in various transactions, while solvency certificates indicate an individual’s or company’s financial health and ability to meet financial commitments.
- Both bank guarantees and solvency certificates are related to financial transactions. Still, a bank guarantee provides direct financial security to the beneficiary, whereas a solvency certificate offers proof of financial capacity without a direct commitment to cover an obligation.
Bank Guarantee vs Solvency Certificate
A bank guarantee is a promise by a bank to pay a fix amount of money to a beneficiary if the party that requested the guarantee fails to fulfill their contractual obligations. A solvency certificate is a document issued by a financial institution that attests to the financial health of a business.
Bank Guarantee, as the word says, is a guarantee made by the bank to its customer that the payment will be made on behalf of debtors in case debtors fail to pay the debt in an international trade transaction. It reduces credit risk to both parties if the transaction does not go as planned.
A solvency certificate is a document a financial institution provides to establish the financial stability of anyone or any business owner. The revenue department, financial institution, or bank issues the solvency certificate.
It is mainly used to ascertain the stability in the finance of an individual and entity by any government and the corresponding commercial office.
Comparison Table
| Parameter of Comparison | Bank Guarantee | Solvency Certificate |
|---|---|---|
| Functions | Bank guarantee mainly gives a guarantee to real estate contractors and infrastructure international projects and reduces credit risks on a transaction | A solvency certificate is issued to an individual or entity as required by the government and commercial office to ensure financial stability. |
| Surety | A Bank guarantee asks for surety of assets or belongings to lend a contract after a certain amount. | Solvency certificates ask for proof of supportive documents which indicate an individual or entity’s financial status. |
| Guarantee | A Bank guarantee gives the guarantee of the amount in case debtors fail to pay the debt | A solvency certificate is a document the bank will not hold any responsibilities to pay liabilities in future |
| Risk | Bank guarantee has high risks involved | A solvency certificate is a document where the risk level is low |
| cost | Bank guarantee charges 0.5% to 1.5% of the guarantee amount | For the Solvency certificate, the fees will differ from bank to bank, |
What is Bank Guarantee?
A Bank guarantee is a guarantee given by a lending institution or financial institution. If the borrower fails to pay the debt, the bank shall take ownership of completing the payment. It is certainly not a debt instrument or loan company.
It gives assurance about the payment to the other party on the debtor’s behalf to reduce the credit risk in an international trade transaction. Letter of credit and bank guarantee are similar, whereas the letter of credit focuses more on international trade. In contrast, the Bank guarantee focuses on real estate contractor and infrastructure projects, which requires international trade transaction.
A Bank guarantee protects both parties from credit risk if the transaction does not go as planned by an agreement. The contractor generally uses a Bank guarantee to bid for big projects as a guarantee; contractors provide proof of financial credibility.
As a need of an entity or contractor, the bank guarantee differs; they are:
- Shipping guarantees
- Loan guarantees
- Advanced payment guarantees:
- Confirmed payment guarantees:
- Foreign bank guarantee
- Financial guarantee
It’s a promise made by the lending institution that the loss caused by the borrower will be paid.
When a financial institution feels that the risk level is increasing, it will ask the borrower for collateral of guarantee amount; it can be assets, shares, mutual funds, stocks, or cash. Bank guarantee encourages the individual or entity on the business front.
What is Solvency Certificate?
A solvency certificate is a document that provides clear information on the financial stability of an individual or an entity. This document is required to ensure the financial position of an individual or entity by the government or commercial office.
The certificate is needed for the following reasons. They are:
- Applying and procuring tenders
- Obtaining government and private contracts
- Visa applications and interviews
- Legal & court matters
The solvency certificate proves an individual’s or an entity’s financial strength. Typically solvency certificate will be issued by the revenue department and the bank after producing a particular set of documents proving an individual’s or entity’s financial position.
Bank provides the certificate to their customers based on the transactions, saving accounts, and property papers that are available to them. Most of the time individual or entity asks for the solvency certificate to avail of the tender or a contract of the government office.
After analyzing the supporting documents, it will issue the certificate and will not be responsible for any liabilities. The bank manager is restricted from issuing specific certificates; if it exceeds, they have to inform the higher authority.
The required supportive documents to issue a solvency certificate by the Bank are mentioned below.
- Application form
- Identity/address proof
- Bank statement (savings/current)
- Income tax returns
- Audited financial statements (companies/partnership firms)
- Property documents and Gold valuation certificate
- Certificate of Net Worth by a Chartered Accountant
- Any other investment certificates
Main Differences Between Bank Guarantee and Solvency Certificates
- The main difference between Bank Guarantee and Solvency Certificate is, The Bank guarantee is a promise or contract, or support given by a bank to its customer. This is offered if the debtors fail to pay the debts; the Bank shall pay, while the Solvency certificate guarantees a person or a business’s financial strength to acquire a tender or a contract.
- Bank guarantee mainly gives a guarantee to real estate contractors and also for international projects that reduce credit risks on the transaction. A Solvency certificate is issued to an individual or entity as it is required by the government and commercial office to understand the financial strength.
- The party will declare the surety of assets to get the bank guarantee if the amount exceeds the banking policy. At the same time, a Solvency certificate requires documents to prove financial strength.
- In the case of the bank guarantee, the bank shall pay the debt. In contrast, the solvency certificate does not allow any liabilities to be undertaken by the bank.
- The charges for getting the bank guarantee and the solvency certificate also differ; the former is charged anywhere between 0.5% to 1.5% of the total guaranteed amount, while the latter has different charges in different banks.
- https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/ibl6§ion=171
- https://www.actuaries.org.uk/documents/some-thoughts-solvency-life-assurance-companies
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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.
