Businesses need regular cash flow for its day to day running, growth as well as expansion. It is not always possible for a business owner to find the funds by his/her efforts alone. The borrowing of credits is the next best way to run the business.
Businesses need considerable funds to make deals with different vendors and other suppliers. Bank guarantee and corporate guarantee are two types of guarantees that can ensure the fund availability for businesses. Bank guarantee is a crucial element to ensure transactions with international companies.
Bank Guarantee vs Corporate Guarantee
The main difference between a bank guarantee and a corporate guarantee is that the bank is the responsible party for repayment in case of default, whereas, in a corporate guarantee, the individual who agreed to repay the loan has the responsibility in the situation of nonpayment.
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 if the borrowers fail to clear the debt, the bank will make the payment for their client.
A corporate guarantee is a type of contract made 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 as well as the individual who agrees to make the repayment of the loan in case the debtor defaults.
Comparison Table Between Bank Guarantee and Corporate Guarantee (in Tabular Form)
| Parameter of Comparison | Bank Guarantee | Corporate Guarantee |
|---|---|---|
| Nature | A bank guarantee is an assurance provided by the bank to the lender that it will make the repayment when the borrower fails to make it. | A corporate guarantee is a type of contract made between a company or corporate institution or individual and a borrower. |
| Payment | When the customer fails to make the payment, the bank is obligated to make the payment. | When the customer fails to make the payment, the guarantor is obligated to make the payment. |
| Involved parties | Bank, customer, and the beneficiary are the three parties involved in the bank guarantee. | The lending party, the borrower, and the guarantor are the three parties involved. |
| Risk | The customer needs to assume the primary risk in the bank guarantee. | The guarantor has the responsibility in 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 in the case the borrower failed to clear the debt, the bank will make the payment for their client.
The bank guarantee is a method for a customer or borrower to draw a loan or acquiring goods or equipment.
With a bank guarantee, a company can buy goods or equipment for the development and further functioning of the company, that cannot happen otherwise. Generally, two types of bank guarantees are available. They are called direct bank guarantee and indirect bank guarantee.
In a direct bank guarantee, banks issue guarantees directly to the beneficiary for both International and domestic businesses. Direct guarantees are given only in the cases where the security of the bank does not depend on the status, validity as well as the implemental ability of the commitment.
Bank guarantees are widely used in overseas transactions because of their easily adaptable features with international legal systems.
Indirect guarantees are most common in the export business where most public bodies or government agencies are the recipients of the guarantee. In the direct type of bank guarantee, a second bank, mostly an overseas bank is used, which has a branch in the country of the beneficiary.
Payment guarantee, advance payment guarantee, credit security bond, rental guarantee, performance bond, warranty bond, etc. are the various types of bank guarantees.
Bank guarantees are for protecting the third party from financial losses and used extensively in personal and business transactions. When big companies make purchases from small scale business owners, guarantee certificates from banks considered as an essential requirement for the transaction.
A bank guarantee can minimize the risk involved in the financial exchange and it may support the sellers to develop their business. The fees usually demanded by the banks are comparatively less and that 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?
By definition, a corporate guarantee is a type of contract made between a company or corporate institution or individual and a borrower. In the guarantee, the guarantor has the responsibility for the liabilities of the borrower.
The three parties involved in the case of a corporate guarantee are the lending party, the borrower as well as the individual who agrees to make the repayment of the loan in case the debtor defaults.
The data required to involve in a corporate guarantee are the name of the debtor, the name as well as the contact information of the person who is providing the guarantee, the information about the lender, the statement about the guarantee limit as well as the signature of the witness.
Corporate guarantees are of two types. Limited guarantee and unlimited guarantee. In a limited corporate guarantee, the liability of the guarantor to the borrowed amount has a specific limit.
In an unlimited corporate guarantee, the liability of the guarantor has no limit and should pay the whole amount in case the debtor defaults.
Corporate guarantees have a prominent role in business dealings when the need of receiving and creating credit arises. Most of these guarantees are for banks and other similar financial entities. Corporate guarantees are a little tough to enforce due to the structural difference between various corporations. A corporation may have different levels of responsible personnel that may include the board of directors, employees as well as shareholders.
Main Differences Between Bank Guarantee and Corporate Guarantee
- The main difference between a bank guarantee and corporate guarantee is, in a bank guarantee the bank is providing assurance for repayment in defaults but in a corporate guarantee, the guarantor has the responsibility of repayment in defaults.
- Bank guarantee can be used for personal as well as business purposes but the corporate guarantee 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 simpler than a corporate guarantee.
- There are straight and subsidiary types of bank guarantees. Limited and unlimited are the two varieties of corporate guarantees.
Conclusion
All businesses require careful financial dealings. Vendors or exporting companies can do their businesses only when there are sufficient guarantees to receive payments for their goods.
Such types of assurances can be provided by a bank guarantee or a corporate guarantee. These guarantees can ensure the reception of payment and increase the potential of small businesses and large companies.
References
- https://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?article=1504&context=elr
- https://elibrary.worldbank.org/doi/abs/10.1596/1813-9450-4771