BG Full Form is Bank Guarantee.It is a crucial financial instrument that offers financial security to businesses by ensuring payment to a beneficiary if a customer fails to meet their obligations.
A bank guarantee, abbreviated as BG, is a financial safety net issued by a bank on behalf of a customer. It guarantees payment to a beneficiary, which can be a supplier, contractor, vendor, or government agency, in the event the customer defaults on their commitments.
Types of Bank Guarantees
Following are the types of Bank Guarantees:
- Financial Guarantees: These ensure that customers meet financial obligations like loan repayments, purchasing goods or services, or paying taxes.
- Performance Guarantees: They ensure customers fulfill non-financial obligations, such as project completion or contract fulfillment.
- Advance Payment Guarantees: These guarantee that a customer will deliver goods or services after receiving an advance payment.
How Bank Guarantees Work
Bank guarantees involve three parties: the bank as the guarantor, the customer (principal) requesting the BG, and the beneficiary set to receive payment in case of default. When the customer fails to meet their obligations, the beneficiary claims the BG, and the bank reimburses them, later pursuing the customer for repayment.
Benefits of Bank Guarantees
The benefits of Bank Guarantees are stated below:
- Improved Creditworthiness: BGs enhance a business’s creditworthiness by assuring beneficiaries of payment in case of default.
- Increased Business Opportunities: BGs expand business opportunities by providing assurance to beneficiaries and, thus, fostering trust.
- Reduced Risks: They minimize risks associated with business transactions by guaranteeing payments.
Bank Guarantee vs. Letter of Credit (LC)
Bank guarantees and LCs serve different purposes. A BG guarantees payment to the beneficiary if the customer fails to meet obligations, whereas an LC ensures payment to the supplier if the customer doesn’t pay.
Advantages and Disadvantages of Bank Guarantees
Advantages: Reduced risks for beneficiaries, improved creditworthiness for customers, increased business opportunities, and reduced risks for customers.
Disadvantages: High costs, potential financial losses in case of default, and a complex application process.
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