Individuals and businesses use bank guarantees to safeguard payments, manage risk, and protect their money. Learn more about the different types of guarantees and their uses here.
4 min read
Apart from basic banking services, banks and lending institutions meet a variety of needs for their consumers. One of their key banking offers are bank guarantees*. Let’s dive in to learn more about it!
N26 Free bank account
✓ 100% mobile ✓ No hidden fees ✓ No paperwork ✓ Free virtual Mastercard ✓ Investment tools
A bank guarantee is an agreement in which the bank acts as a guarantor for you, agreeing to cover your payment obligation to a third party. Here, the bank effectively agrees to act as a risk manager for you (applicant) and for the third party (beneficiary) in case you aren’t able to make the payment. In simple terms, if you can’t pay off your debt, a bank guarantee means that the bank will pay the bill.
Types of bank guarantees
There are different types of bank guarantees. Here are a few of the main ones:
Tender guarantees
Banks give these guarantees—also called bid bonds—in situations that involve a tender or contract. This type of guarantee is often used for large-scale projects, such as construction work or manufacturing. It’s effectively the bank paying damages if a company wins a tender, but then defaults on the contract and doesn’t begin work. A tender guarantee provides security that the company placing a bid for a contract is actually prepared to follow through and start the project.
Advance payment guarantees
Also known as a cash guarantee, this is where a bank commits to ensuring that any company doing labor gets paid. Whereas certain kinds of goods are paid for up front, many companies only invoice for their work after the services have already been delivered. With an advance payment guarantee, if a buyer doesn’t pay for any goods or services that the seller has already provided, then the bank is obligated to compensate the seller.
Performance guarantees
A performance guarantee ensures that a seller provides the buyer with the goods or services as specified in their contract. If this doesn’t happen and there’s a dispute, the bank pays damages to the buyer. This type of guarantee is also used for major building projects or manufacturing contracts. The key difference is that a performance guarantee makes sure that all the terms of a contract are fulfilled—not just that the project will start, but that it will get finished as agreed.
Deposit guarantees
If a bank fails to meet its obligations, EU legislation protects money that has been deposited into accounts at that bank. Deposit guarantee schemes (DGS) are a type of government bank guarantee wherein the government refunds a partial amount to depositors whose bank has gone out of business. This is designed to do two things:
Safeguard depositors' money by guaranteeing deposits up to