In this course you will learn about Bank Guarantee. It has become a very important part of import and export as well as other business purposes. While a seller (or exporter) can require the purchaser (an importer) to prepay for goods shipped, the purchaser (importer) may wish to reduce risk by requiring the seller to document the goods that have been shipped. Banks may assist by providing various forms of support. For example, the importer’s bank may provide a letter of credit to the exporter (or the exporter’s bank) providing for payment upon presentation of certain documents, such as a bill of lading. The exporter’s bank may make a loan (by advancing funds) to the exporter on the basis of the export contract. Other forms of trade finance can include Documentary Collection, Trade Credit Insurance, Factoring or forfeiting. Some forms are specifically designed to supplement traditional financing. Secure trade finance depends on verifiable and secure tracking of physical risks and events in the chain between exporter and importer.
The advent of new information and communication technologies allows the development of risk mitigation models which have developed into advance finance models. This allows very low risk of advance payment given to the Exporter, while preserving the Importer’s normal payment credit terms and without burdening the importer’s balance sheet. As trade transactions become more flexible and increase in volume, demand for these technologies has grown. Bank Guarantee is an instrument issued by the Bank in which the Bank agrees to stand guarantee against the non-performance of some action/performance of a party. The quantum of guarantee is called the ‘guarantee amount’. Candidate will gain in depth knowledge of all the topics in this course.
In this course we are going to learn about what is a bank Guarantee and how it works. The following is the description of what a bank Guarantee is and what is it’s importance.
Bank Guarantee helps to have a third party’s vetting for your business.
When running a business, you might come across a situation that your client may ask you to provide a financial guarantee from a third party.
In such circumstances, approach your bank and ask it to stand as a guarantor on your behalf. This concept is known as bank guarantee (BG).
Obviously, the bank will not just issue such guarantee with its own due diligence. The bank does its own thorough analysis of the financial well being of company XYZ to assess the amount of guarantee it can issue. After all, the bank is at a risk too, in case the client defaults. This amount is called a limit.
Here too there is a catch. The bank will issue guarantee provided the company has not exceeded its overall limit for BGs. And if the Government of Ethiopia is not satisfied with the performance of the contract at a later date, it can invoke the BG.
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