Are you planning to set up your business in trading goods/services? If yes, then you need to learn everything about this industry. Establishing a business is not a piece of cake and requires a complete understanding of the market and flow of the business. For instance, if you are planning to set up your business in trading goods/services, or even a client/contractor in this industry, you need to learn how the workflow. There are numerous terminologies like Performance Guarantees, Bank Guarantees, Letter of Credit, etc. that you ought to learn before aligning yourself in this sector. Let us discuss a few of these terminologies in the following segments.
What are Performance Guarantees?
A performance guarantee is simply just a bond between a client and the contractor. So, if a client is looking to outsource a project to an individual or organization, a performance guarantee is required in such a case. Now, if a client assigns a task to a third party, wouldn't it need some document of proof that the project will conclude within the agreed deadline? The answer is yes. A client would be needing proof of document to ensure that everything complies with the agreement between the client and contractor. This is where performance guarantees comes in to ensure the client that the business will conclude within the terms signed by both the parties.
A performance guarantee is not directly handed over by the contractor but by the financial institution or bank representing the contractor. This also ensures the client that in case of failure to conclude business as per the agreement, compensation for monetary losses will be assured to the client. Therefore, the bank issues these performance guarantees to the client ensuring the completion of work adhering to the terms and conditions of the contract.
What are Bank Guarantees?
Similar to performance guarantees, a bank guarantee is also provided by the financial institution to the client. The only difference is that bank guarantees provide something to the client as security. Bank guarantees are provided in the interest of risks involved in a business. This assures the client a guarantee and promotes a business model where clients can safely work with new or upcoming contractors or third parties.
Once both parties enter into an agreement, the client may request the bank to issue a bank guarantee. So, these bank guarantees represent an assurance that all the financial obligations will be met in case the contractor defaults.
The bank guarantee serves as a risk management tool for the beneficiary, as the bank assumes liability for completion of the contract should the buyer default on their debt or obligation.
Here is an example to help you understand these two terms in a simple manner. Suppose there is an organization ABC looking to outsource business to a contractor. To do so, ABC Company will require a performance guarantee and a bank guarantee from the financial institution representing the contractor. This bank will provide ABC Company the assurance required to promote the trade between two parties. So, the concept of performance guarantees and Bank Guarantees plays a crucial role if you are looking to step into trading goods/services.
For more information visit our website: https://merchantcreditcorp.co/
Merchant Credit and Guarantee Corporation Limited (MCG)
Phone: +64 9 5244269
Email: info@merchantcreditcorp.co
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