PROJECT FUNDING THROUGH TRADE FINANCE INSTRUMENTS - BANK GUARANTEE - For Your Read

In the context of project funding, a bank guarantee can be used as collateral to secure financing for a project. The bank guarantee serves as a commitment from the issuing bank to pay a specified amount of money to the lender if the borrower fails to fulfill its obligations under the contract or agreement.



 For example, suppose a construction company is seeking financing for a new infrastructure project. The lender may require the company to provide a bank guarantee to secure the loan. The construction company would then approach its bank to issue the bank guarantee, which would be a commitment from the bank to pay the lender if the company fails to complete the project or repay the loan.

The bank guarantee is typically issued for a fixed period of time and for a specified amount, which is usually a percentage of the loan amount. The issuing bank charges a fee for issuing the guarantee, which is typically a percentage of the guaranteed amount.

The bank guarantee can be in the form of a performance bond or a payment guarantee. A performance bond guarantees that the borrower will complete the project according to the agreed terms and conditions, while a payment guarantee guarantees that the borrower will pay the lender according to the agreed terms and conditions.

In summary, a bank guarantee can be a useful way to secure project funding by providing assurance to lenders that the funds will be repaid even if the borrower is unable to fulfill its obligations under the contract or agreement. However, it's important to note that the borrower will be required to pay a fee for the bank guarantee, which can increase the overall cost of the project.


Arasan Trade Finance Consultant - + 91 9345516057


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