If your business is engaged with international trading, it is likely to face a wide range of risks, particularly credit risks (for suppliers) or non-receipt of goods (for importers). Trade financing can help mitigate these risks, facilitating streamlined trading operations and improving efficiency. And one of the most widely used trade finance instruments is Bank Guarantee.
Parties to trade such as exporters, importers or contractors may need a bank guarantee which functions as a promise of payment. Often, an exporter would require the other party to make the payment upfront before they can ship the goods. This is especially true if the party to the trade is new or does not have established market credibility.
However, it may not be financially viable for the importer to pay upfront. In such cases, the exporter may require a payment guarantee from a reputable bank or financial institution. This can be in the form of a bank guarantee. According to banking expert Wolfgang Zulauf, it is one of the most important trade financing instruments businesses can leverage to facilitate international trading.
A bank or financial institution underwrites a bank guarantee, promising to make the payment on behalf of the customer (importer) in case the latter fails to meet certain obligations as mentioned in the trade agreement. It is crucial for international trading because, without a bank guarantee, many exporters will not open a line of business with importers.
Some of the most popular types of bank guarantees are:
- Advance payment guarantee
- Payment guarantee
- Performance bond
- Tender guarantee
A good banking institution such as SUISSE BANK PLC will understand your business, its financial credibility and your trading need to help determine the right type of bank guarantee. This enables you to do international trading in an independent and risk-free way.
Through a bank guarantee, the financial institution ensures that the liabilities of the debtor (importer) will be duly met if the latter fails to settle the payment. Through this financial instrument, the importer can buy equipment, order bulk goods, etc.
However, understanding how a bank guarantee can work for your business can be intimidating. Therefore, it is crucial to seek advice from a banking expert like Wolfgang Zulauf. He can guide you with the right type of guarantee to choose from.