Bank guarantees are a great way for small businesses, developers and individuals to make purchases of goods that they would not otherwise be able to make.

Imagine if you owned a café and needed to purchase expensive kitchen equipment. The vendor of the equipment wants a guarantee that you will meet the costs, so they request a bank guarantee. You ask for a bank guarantee from your financial lender, which provides one in writing, and you pass this letter to the vendor. By promising to meet the costs if you are unable to, your financial lender becomes essentially a co-signer on the purchase of the kitchen equipment.

However, the bank will only give you a guarantee if you have sufficient assets to provide security, such as property or cash investments.

Here are some of the common uses for bank guarantees:

• Large construction projects often require bank guarantees from contractors;
• Builders may accept bank guarantees in place of cash payments up-front;
• A bank guarantee may be required to secure a business contract or a leasing arrangement;
• A bank guarantee may be used as a bond issued to a landlord for security against damage or unpaid rent.

There are several advantages of using bank guarantees

• In lieu of paying immediately from your cash reserves, your customers or suppliers have the security of a bank guarantee;
• Not tying up all your money in one project allows you to take advantage of other business opportunities as they arise.
• Your cash is freed up for other investment or growth opportunities.

Need more information about bank guarantees? Contact your bank or lending institution today.