Bank guarantees have become an important instrument or document to facilitate cross-border Commercial engagement while providing financial security and trust among parties. One can also lease SBLC or a BG to get a cash amount.
In this article, you will discover the relative advantages and disadvantages of bank guarantees for those who wish to smarten financial strategies and expand their businesses.
How can an SBLC document benefit your business?
A standby letter of credit is a great financial instrument that provides a guarantee of payment to businesses. Generally, the document is issued by a bank and serves as a safety net of payment, so the buyer will receive the payment in case the client fails to fulfil the obligations. SBLC BG providers and SBLC providers use to provide the document.
Key benefits of SBLC:
- Generates trust
An SBLC demonstrates the financial credibility and stability of the client; therefore, a client can secure more deals and contracts with other parties across the world.
- Facilitate trade
The document minimises the risk in local or international transactions, which provides the proper assurance to all the involved parties.
- Support growth
When businesses have a financial guarantee, they don't have to worry about anything. They don't fear taking up large projects or going into new markets, which open the doors of expansion and opportunities for you.
- Reduces risk factor
The document keeps you protected against non-payment or non-performance, which is especially beneficial in industries that are at high risk.
Benefits of bank guarantees
- Improved trust and credibility
A bank guarantee allows a business to enhance its credibility while generating trust. When a trustworthy and credible financial institution backs a company, then it seems more reliable. As per reports, a company with a bank guarantee is 37% more likely to get an international contract when compared to a company who don't possess any bank guarantee. The bank guarantee results in higher credibility of the company, generating trust among other parties, helping the company to secure more contracts and deals.
- Mitigates risks
A bank guarantee serves as insurance when it comes to high-value transactions and when there is a high risk associated. If they have been used correctly, then they reduce the risk of non-payment. As per the study, the risk of non-payment is reduced by 78% when it comes to international transactions by using bank guarantees.
- Access to large contracts
If you provide BG, then smaller enterprises get in a position to bid for large contracts that would otherwise not be financially within reach for the smaller business. This helps a small business to grow at a faster rate. According to reports by small business associations, small to medium companies can get the opportunity to get deals with a 40% increase in the value that they wouldn't get otherwise.
- Performance enhancement
A bank guarantee enhances the performance standard of both contractor and supplier. Once a financial institution knows that the guarantee is backed by performance, then the chances that the company will work according to the contractual terms and obligations will increase. According to statistical data, it increases the chances of a project's completion by 31%.
Disadvantages of Bank guarantees:
- Collateral requirements
There is a requirement for a lot of collateral to issue guarantees by the financial institution. Generally, banks get a 100% guarantee for the amount that they provide. They check the assets and liquidity of any business so that proper support can be provided.
- Borrowing capabilities
If there is a bank guarantee that comes into play, this is counted as the overall credit limit assigned to a company. As per reports, companies that have extensive bank guarantees reduce their chances of getting additional loan amounts.
Knowing the advantages and disadvantages, you can decide whether a bank Guarantee is the right option for you.
