How Surety Bonds Are Different From Bank Guarantees?

Bank guarantees are issued to secure a seller& payment while a surety bond is issued to secure the party to the contract from the risk of a broken contract.

Being a global trader, you often deal in various trade finance instruments such as Letters of Credit, Standby LCs or Bank Guarantees, and many more. Have you ever thought about what bonds are and how are they different from other trade finance instruments like a bank guarantee? This blog can help you.

Difference Between Bank Guarantee And Bonds

Both bank guarantees and bonds are considered some of the most important types of financial instruments that provide payment security to protect the parties entering into the contracts for the exchange of goods & services. These instruments assure sellers that they would be paid on time by the buyer. So what is the difference? Let’s start by understanding their meaning.

What is a Bank Guarantee?

1. A bank guarantee is a legal promise made by the issuing bank or financial institution to the particular seller/supplier that if the borrower/applicant fails/defaults to pay or perform the terms & conditions mentioned in the BG contract, the bank will act as a guarantor and cover the full or remaining amount of debt on behalf of its borrower.

2. BGs are one of the most frequently used trade finance instruments by business entities to initiate purchase equipment, raw materials, machinery, etc, with an assurance of on-time payment even if the borrower is not capable of paying the amount back.

3. When the transaction is complete between the trading parties, the seller can present the document to the bank and receive payment.

4. Bank guarantees establish trust between the trading partners who don’t know each other due to cross-border transactions.