Depending on the purpose of the Guarantee, the Bank Guarantees may be classified as under:
1. Tender Bond:
This type of bank guarantee is also known as a bid bond. The purpose of a tender bond is to prevent a company from submitting a tender, winning the contract and then declining to accept it on the grounds that the deal is no longer lucrative. Tender bonds offer buyers security against dubious or unqualified bids. They are often mandatory for public invitations to tender.
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2. Performance Bond:
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This is also known as a performance guarantee. A performance bond/guarantee provides security for any costs that may be incurred by the bond beneficiary on non performance of a contractually agreed service and/or non-compliance with the contractual deadline.
3. Credit Guarantee:
Borrowers are often required to provide collateral for a credit line or a loan. A third party may also provide collateral. A bank guarantee is one of the options creditors have to ensure that a loan will be repaid. (On the condition that the lending and guaranteeing banks are not identical.)
4. Payment Guarantee:
A payment guarantee, or payment default guarantee, provides security against default for the goods to be delivered, for example. If the debtor fails to make payment when due, and the beneficiary has fulfilled his or her contractual obligations, e.g. goods have been delivered and/or services have been provided in accordance with the contract, a written declaration to this effect is generally sufficient to redeem payment from the guaranteeing bank.
This instrument can be used instead of a letter of credit if, for example, the buyer does ‘not require or demand proof of delivery by means of the usual original delivery documents.
5. Confirmed Payment Order:
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This is an irrevocable obligation on the part of the bank to pay a specified sum at a specified time to the beneficiary (creditor) on behalf of the customer.
6. Advance Payment Guarantee:
The advance payment guarantee is intended to bind the supplier to use the advance payment for the purpose stated in the contract between the buyer and the supplier. An advance payment provides the supplier with funds to purchase equipment or components, for example, or to make other preparations.
In general, the advance payment guarantee should contain a reduction clause that automatically reduces the amount in proportion to the value of the (partial) delivery (ies). The advance payment guarantee should only become effective once the advance payment has been received.
7. B/L Letter of Indemnity:
This is also called a Letter of Indemnity. Individual bill of lading or the full set can go missing or be held up in the mail. Carriers may be liable for damages if they deliver the consignment before receiving the original bill of lading.
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A bank guarantee in the carrier’s favor for 100-200% of the value of the goods enables them to deliver the goods to the consignee without presentation of the original documents.
8. Rental Guarantee:
This is a guarantee of payment under a rental contract. The guarantee is either limited to rental payments only, or includes all payments due under the rental contract (e.g. including cost of repairs on termination of the rental contract).
9. Credit Card Guarantee:
In certain circumstances, credit card companies will not issue a high value credit card without a bank guarantee. Such kind of guarantee extended by a Bank is known as a Credit Card Guarantee.