The Applicability Of Bank Guarantee In The United States: Equiflux Capital Group Opinion

A bank guarantee may also be called a standby letter of credit or be referred to as a bond. Bank guarantees from a reputable institution can help you establish business relationships, increase your access to cash flow and capital, protect your business from losses, and set you up for international opportunities.

Another type of guarantee is the loan guarantee from the Export-Import Bank of the U.S. This guarantees creditworthy foreign buyers of financing for U.S. capital goods and services purchases. U.S. companies receive payment when the product is shipped from the U.S. to a foreign buyer.

The U.S. Securities and Exchange Commission (SEC) warns investors to be wary of secretive "high-yield" investments marketed as as a "Prime Bank" program or "Prime World Bank" financial instrument. These fraudulent investments may involve legitimate-sounding language such as "bank guarantee" or "standby letter of credit."

Examples of Bank Guarantees

• Performance bond guarantee: Serves as collateral for the buyer’s costs if services or goods are not provided as agreed in the contract.
• Advance payment guarantee: Acts as collateral for reimbursing the buyer's advance payment if the seller does not supply the specified goods per the contract.
• Warranty bond guarantee: Serves as collateral, ensuring ordered goods are delivered as agreed.
• Payment guarantee: Assures a seller the purchase price is paid on a set date.
• Rental guarantee: Serves as collateral for rental agreement payments.

For example, the World Bank offers a bank guarantee program for projects. These guarantees provide commercial lenders security against payment default or failure to meet performance obligations by governments.

What Are the Different Types of Bank Guarantees?
Two key types of bank guarantees include a tender bank guarantee (bid bond) and a performance guarantee. Tender bank guarantees reimburses the buyer (who has already supplied some funding) if you, the supplier, don't sign a contract or fulfill conditions. Performance-based guarantees are for obligations laid out in a contract, such as particular tasks.

What Is the Financial Instrument for a Bank Guarantee?
The financial instrument used in a bank guarantee is called a banker's acceptance.
Do Banks in the U.S. Issue Bank Guarantees?
Banks in the U.S. often do not issue bank guarantees. Instead, they issue standby letters of credit serving the same purpose.

Bottom Line
Guarantees help protect international trade relationships by mitigating risks if a contract falls through, suppliers don't perform according to a contract's terms, or a buyer won't pay for goods. While bank guarantees are not common in the U.S., you should be able to get a similar guarantee via a standby letter of credit.