Key Things Business Owners Must Know About Bank Guarantees in the UAE

The use of bank guarantees is widely popular among business owners seeking corporate finance services in Dubai. A bank guarantee is a promise made by a commercial bank to the beneficiary that it will assume liability for the principal debtor if it fails to meet the contractual obligations. Bank guarantees are considered a core part of trade finance services in Dubai as the bank offers to act as the guarantor on behalf of a customer, eliminating the risks involved in a trade transaction.

However, most businesses may find the process of obtaining a guarantee complex for which they can use the services of corporate finance firms in Dubai. Meanwhile, this article will help business owners to find useful insights into the use of bank guarantees in the UAE.

What is a Bank Guarantee?

A bank guarantee comes into play when two parties enter into an agreement to complete a trade transaction. Through a bank guarantee, the bank promises a sum of money to the beneficiary but it will pay the amount only when the other party fails to meet the obligations set out in the contract. A bank guarantee safeguards a trader from potential loss or damage that may arise from the non-performance of one of the parties in the agreement. If one party fails the contract, the other can invoke the bank guarantee by filing a claim and receiving the guaranteed sum. In this way, the buyer or seller can ensure that the trade transaction is completed even when one party failed to meet the contractual obligations.

Who Uses Bank Guarantees Frequently?

In most common cases, a bank guarantee becomes part of the arrangements between a small company and a large business. The large company seeks protection against the potential risk posed by the small firm toward the trade transaction. Therefore, the large company demands the small business receive a bank guarantee in advance of work. Directly approaching a bank may not help a small firm to get a bank guarantee easily, However, corporate finance firms in Dubai can help business owners to arrange a bank guarantee facility quickly.

Features and Benefits of Bank Guarantees in the UAE

Understanding the features and advantages of obtaining a bank guarantee in the UAE is beneficial for business owners as they can easily meet big trade transactions. Applying for a bank guarantee through companies providing corporate finance services in Dubai will make the process more simple and hassle-free. A bank guarantee assures a seller that the price of purchase will be paid on a specific date. A bank guarantee also serves as collateral for reimbursing the advance payment from a buyer if the seller fails to supply the goods as per the contract. Moreover, the confirmed payment order is an irrevocable obligation and the bank pays the beneficiary a set amount on a specific date on its client’s behalf.

Types of Bank Guarantee Businesses can Get

Corporate finance companies in Dubai can help business customers to obtain different types of bank guarantees, depending on the security requested by the borrower. They are given below:

Loan Guarantee: A Laon Guarantee is provided by the bank to pay off the debt in case the borrower defaults

Advance Payment Guarantee: In an Advance Payment Guarantee, the seller will be provided with an advance payment for the goods or services. The buyer will receive a refund if the seller fails to meet the requirements.

Performance Guarantee: A Performance Guarantee means the bank will pay compensation if the beneficiary does not receive the required work as promised

Deferred Payment Guarantee: Banks provide Deferred Payment Guarantees to sellers to clear the deferred instalment payment. If a buyer who agreed to pay for a good in 10 defaults on a specific instalment, the bank will pay as per the bank guarantee agreement

Shipping Guarantee: A Shipping Guarantee can be invoked if the buyer fails to pay for the shipped goods. The bank will pay on behalf of the buyer and saves the shipping company from unexpected losses

Difference Between Bank Guarantees and Letters of Credit

Compared to a Letter of Credit (LC), a bank guarantee requires much more commitment on the part of banks. Both LC and Bank Guarantee assure a sum of money to a beneficiary. However, unlike an LC, the sum is paid only if the opposing party does not fulfil the stipulated obligations under the contract. In this way, a Bank Guarantee is used to protect a buyer or seller from loss or damage due to nonperformance by the other party in a contract. Corporate finance companies in Dubai can help businesses obtain both LCs and Bank Guarantees depending on the specific requirement.

Consult with the Best Corporate Finance Firms in Dubai, UAE

Businesses looking to get bank guarantee facilities can approach corporate finance firms in Dubai such as Jitendra Chartered Accountants (JCA) to navigate the tough requirements set out by the banks. As a leading provider of corporate finance services in Dubai, JCA has partnered with top banks in the country. This means getting a bank guarantee in the UAE is no longer a complex process for businesses. We also provide robust trade finance services in Dubai including Bank Overdrafts, Letters of Credit, Project Finance, Business Loans, Cheque Discounting, Invoice Discounting, Trust Receipts etc.