Bank Guarantee ( MT - 760 ) is an irrevocable commitment issued by a bank on behalf of their customer who has entered in a contract to purchase goods from a supplier and promised to meet all financial obligations to the supplier in the event of default. In other words, a Bank Guarantee is an undertaking of a bank on behalf of its customer.
A Bank Guarantee often helps firms conduct their business with parties they would never normally get the chance to deal with. Many suppliers will often choose to do business with customers that have a Bank Guarantee because it eliminates the risk that they will not receive the appropriate payment for the goods that they are selling.
Bank Guarantees are issued for a variety of purposes, such as to improve the credit ratings for issuers of industrial development revenue bonds and commercial papers; to provide back-up facilities for loans granted by third parties; to assure performance under construction and employment contracts; and to ensure the account party satisfies financial obligations payable to major suppliers.