A guarantee is a formal assurance or agreement from the third party on certain conditions will be fulfilled by them. If debtors fail to make a payment towards the supplier, bank guarantees to pay on a certain amount.
A bank or financial institution provides many services to its customers. It lends loans and guarantees the payment towards another party. Bank also encourages entity or individuals by guaranteeing payment towards the purchase. It increases business activity.
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. Bank Guarantee and Solvency Certificates are services provided by the bank.
Bank Guarantee vs Solvency Certificate
The main difference between Bank guarantee and Solvency certificate is that Bank guarantee is a promise or guarantee given by the bank to its customer in case debtors fails to pay the debts, the bank will make the payment in an international trade transaction. While Solvency certificate is a document that provides the detailed financial stability of an individual or entity.
Bank Guarantee as the word says it guarantees made by the bank to its customer that the payment will be made on behalf of debtors in case debtors fails to pay the debt in an international trade transaction. It reduces credit risk to both parties in case transaction does not go as planned.
Solvency certificate is a document that is provided by the financial institution to establish the financial stability of anyone or any business owner. The solvency certificate normally issued by the revenue department or financial institution or bank.
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 Between Bank Guarantee and Solvency Certificate (in Tabular Form)
| Parameter of Comparison | Bank Guarantee | Solvency Certificate |
|---|---|---|
| Functions | Bank guarantee mainly gives a guarantee to real estate contractor and infrastructure international projects and reduces credit risks on a transaction | Solvency certificate is issued to an individual or entity as required by the government and commercial office too sure about financial stability. |
| Surety | Bank guarantee asks for surety of assets or belongings to lend guarantee after a certain amount | Solvency certificates ask proof of supportive documents which indicates individual or entity financial status |
| Guarantee | Bank guarantee gives the guarantee of the amount in case debtors fail to pay the debt | Solvency certificate is a document, the bank will not hold any responsibilities to pay liabilities in future |
| Risk | Bank guarantee has high risks involved | 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 Solvency certificate the fees will differ from bank to bank, |
What is Bank Guarantee?
Bank guarantee is a guarantee given by the lending institution or financial institution if the borrower fails to pay the debt, the bank shall take the ownership of completing the payment. It is certainly not a debt instrument or loan company.
It is giving assurance about the payment to the other party on behalf of the debtor to reduce the credit risk in an international trade transaction. Letter of credit and bank guarantee are similar, where the letter of credit focuses more on international trade while the Bank guarantee focuses on real estate contractor and infrastructure projects which requires international trade transaction.
Bank guarantee protects both parties from credit risk if the transaction does not go as planned by an agreement. Bank guarantee is normally used by the contractor to bid for big projects as a guarantee, contractors provide the proof of financial credibility. The bank will guarantee to up to a fixed amount and it will not exceed the amount by keeping bank risk factors.
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 made by the borrower will be paid.
When financial institution feels if 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?
Solvency certificate is a document which provides clear information on the financial stability of an individual or an entity. This document is required to make sure about the financial position of an individual or the 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. Normally solvency certificate will be issued by the revenue department and the bank after producing a certain set of documents which proves the financial position about an individual or entity.
Bank provides the certificate to their customers based on the transactions, saving account, property papers which are available with him. Most of the time individual or entity asks for the solvency certificate to avail the tender or a contract of the government office.
After analyzing the supporting documents, it will issue the certificate and it will not hold responsibility for any kind of liabilities. The bank manager has a restriction to issue a certain number of certificates, if it exceeds, he or she has informed the higher authority.
The required supportive documents to issue 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 Certificate
- The main difference between Bank Guarantee and Solvency Certificate is, The Bank guarantee is a promise or guarantee or support given by a bank to its customer. This is offered, if the debtors fail to pay the debts, the Bank shall make the payment, while Solvency certificate guarantees a person or a business’ 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. Whereas Solvency certificate is issued to an individual or entity as it is required by the government and commercial office to understand the financial strength.
- Surety of assets is to be declared by the party to get the bank guarantee if the amount exceeds the banking policy. Whereas Solvency certificate requires documents to prove financial strength.
- In the case of the bank guarantee, the bank shall take the responsibility to pay the debt whereas 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.
Conclusion
Bank guarantee and solvency certificate are similar, both are used to acquire something in the business world. Bank guarantee is used by the real estate contractor to bid for contact and projects in a big company and shows guarantee amount. It proofs finance credibility.
Similarly, an individual or entity asks for a solvency certificate to the bank or revenue department to show the financial position to the government to acquire tender or contract of the government.
Sometimes, the entity or individual can show their solvency certificate to assure the bank guarantee for an international trade transaction. As financial institution will ask for collateral for the guaranteed amount after a certain fixed amount, solvency certificate can act as a list of property or collateral to individual or entity.
References
- 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