A bank guarantee is a commitment from a lending institution to pay a sum of money or to honor a transaction if the borrower fails to do so. It is an agreement issued by a bank on behalf of its customer to assure another party that the customer has the financial ability to meet its contractual obligations. As such, a bank guarantee is widely used for international and cross-border transactions to provide an increased level of protection to the other party.

A bank guarantee can act as a form of protection for a variety of transactions, including the purchase or sale of services or goods, the performance of a certain service and the fulfilment of contracts. By providing such a guarantee, the lending institution can reassure the other party of the debtors’ ability to repay and provide compensation for any potential losses in the event of a default.

The customer taking out the bank guarantee pays a fee to the bank for the service. The fee is usually a percentage of the guarantee amount, although there is usually a minimum initial amount. The guarantee usually lasts for a specific time period and must be renewed periodically. The customer outlays the fee to the bank which then becomes a guarantee against any risk of the customer not meeting its contractual obligations.

It is important to note that bank guarantees are not the same as a letter of credit. Letters of credit guarantee performance of a contract between two parties, while bank guarantee protects one party from the other’s default.

A bank guarantee is used mainly in large-scale business transactions between two parties and represents a certain degree of trust between them. It is a risk mitigating measure that ensures that one party to a transaction is able to meet their financial obligations, even if the other party does not. As such, it is an important part of many business transactions and is often used in international transactions as well.