Understanding The Complexities Of Bank Guarantees
Bank guarantees are important considerations for the investor. If you haven’t considered them to this point, now is the time to do so. These products provide a promise to the company or individual that if the individual making the purchase does not hold up their end of the agreement, does not answer for their debt or defaults on it, that the financial institution behind the product promises to pay for it. You can consider them in their simplest of terms as being similar to a cosigner on a loan. Should the original individual that owes the money default on that loan, the cosigner of it agrees to make full payment as promised to the lender.
There is more to understand about bank guarantees, though. In order for any type of promise to be official, it is necessary for there to be written documentation of it being so. The guarantors or their agent must sign, in writing and with witness to the backing that they are providing. If this was not provided, the individual would not have the necessary backing to pursue the guarantor for the defaulted funds should that be necessary down the road. Generally speaking, they are always written contracts.
What are the advantages then of bank guarantees? Those that take a guarantee will find that it can easily be used and can be easily put into place by court action should that be necessary. In addition, if the guarantor decides to pursue collateral security, the promise can be ignored because of this. It is important to know who is providing for the security as there can be more than one that does so.
There are also disadvantages to bank guarantees. Unless the promise has been backed up by some form of deposit or another type of security, there is no definite for the value of it. In addition, at any time, the guarantor may have a financial change occur, which could make it less of a security at that point. Should an unsupported bank guarantee be taken on, it should be carefully and thoroughly investigated so as to leave no doubt of the benefits of risks that are involved. Should it need to be taken to court to be honored, there can be difficulties in making sure it is honored as mistakes or changes can be put into place that could make it null and void.
Understanding the types and benefits as well as the disadvantages of bank guarantees is quite important. No matter if you will play the role of the grantor or the debtor, this security should be carefully chosen for only the right situations. Although it looks promising for many, for others it can be a mistake to take on.
About the author: Sean Rasmussen is the webmaster and founder of Universal Wealth Creation. Copyright © 2004 - 2008 Universal Wealth Creation |
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