Functions of bank guarantees

Bank guarantees are products of credit to ensure the successful completion of the commitments they have made their customers to future international exchanges (can be both import and export and investment).

Bank guarantees are used by exporters and importers because the banks function as guarantors of the transaction. When an importer purchases a specific amount of goods, the bank would pay the exporter for it if the bank is satisfied with the documentation that the exporter shows. The SBLC benefits the seller because by using them, they would receive payment for the goods if the buyer does not pay.

The SBLC establishes the amount and date that the seller is to receive payment if the importer does not fulfill its obligations.

With regard to validity, the SBLC are not indefinite and they should always be used within their period of validity in a clear and unambiguous way. We say the bank guarantee is no longer valid when the guaranteed obligation has expired and the beneficiary has not requested the guarantee. It is understood that the obligation has been fulfilled and therefore the bank can automatically cancel their commitment.

There are three basic kinds of bank guarantees:

There is a period before the SBLC comes to being. Banks can decide to grant the credit and reserves the funds and in the meantime, it assesses the proposal.

Technical bank guarantees are usually give to non for profit organizations, or socially oriented businesses or institutions.

The most common reason that motivates the use of SBLC are financial. The financial institutions provide the payment for the transactions when one part fails to do so.

Bank guarantees are beneficial to the importer because they protect them when the exporter does not fulfill its obligations. In the case that the merchandise brought by the exporter was of a lower quality that the one agreed beforehand, or if it was damaged upon arrival the bank guarantee will refuse to pay the exporter for such goods.

On the other hand, when bank guarantees are given to an exporter it means that the exporter is protected against noncompliance of the importer. These types of bank guarantees make sure that the importer makes the payments for the merchandise it has received on a timely basis, otherwise the bank would cover those responsibilities.

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