What is Bank Guarantee? Features, Process, and its Difference from Letter of Credit

Bank Guarantee Services

Every business needs a backbone of funds. It is for its effective operations and to maintain the competition in the market. Moreover, there are several debt instruments available for funding. While Bank Guarantees are used the most. In this article, we’ll shed light on what is a bank guarantee, its key features, its process, and how it differs from the Letter of Credit. 

What is Bank Guarantee?

The bank guarantee is a commitment provided by the buyer’s bank. It ensures that if the buyer fails to fulfill their obligations or make the payment, the bank will step in and make the payment, up to the specified amount mentioned in the guarantee. The lending institution offers Bank Guarantee (BG) as a financial instrument. However, the lender will ensure that the liabilities of a debtor will meet. In other words, the lender promises to cover a loss in case the borrower defaults on the loan. In the process of BG, four parties are involved in the transactions. Those are the applicant/ borrower, the issuing bank, the beneficiary and the beneficiary bank.

Features of Bank Guarantee

• BG builds confidence between the lender and the borrower. It adds assurance of transaction between an exporter and an importer. The primary reason for opting for BG is that many times the exporter and importer are unaware of transacting with each other. So, there can be a risk in the transaction. Hence, to overcome this risk involved, Bank Guarantee clears the hurdles.
• The BG obtain for a specified period. It is as per the need and requirements of the borrower. The applicant can hold the BG only up to a specified period, they can further renew it after maturity.
• The bank guarantee can or cannot hold assets against the instrument. The collateral depends upon the availability of the asset and the terms & conditions of the agreement between the lender and the borrower. It is also obtained without collateral.

Parties Involved in the Bank Guarantee Process 

• The applicant (importer): who requests BG from his banker as per the demand from the beneficiary
• The issuing bank: as per the request from the applicant, the bank issues the BG on the beneficiary’s bank.
• The beneficiary (exporter): is the party who demands BG.
• The beneficiary’s bank: is the one who receives the BG on behalf of the beneficiary.

How does a bank guarantee work?

“ABC Pvt Ltd” is an exporter company that deals with “XYZ Pvt Ltd”, and an importer. The exporter shipping goods requests the importer to get the Bank Guarantee from his banker. The banker on demand from the customer applies for BG and reduces the risk involved in the transactions. After receiving the BG, the applicant submits a copy to his other party which eases the procedure in the business operations. Here, “XYZ Pvt Ltd” is the applicant, the bank is an issuing party and “ABC Pvt Ltd” is a beneficiary.

In case of non-performance or default, the beneficiary can submit a claim to the bank.  The bank evaluates the claim and, if valid, settles the claim by making payment or fulfilling the obligation as specified in the bank guarantee.

Apply for Bank Guarantee

• The parties while transacting with each other, the exporter demands BG from the importer.
• The importer requests his bank for the BG and submits the necessary documents.
• After preparing BG, the bank communicates the same to the importer.
• The importer then requests the bank to send the BG to the exporter’s bank.
• The exporter’s bank on receiving BG communicates the same to the exporter.
• The exporter then ships the goods towards the importer after receiving the BG from the importer.

Here is the case study of the Bank Guarantee Process.

Difference between a Bank Guarantee (BG) and a Letter of Credit (LC)

In the case of BG, payment has been made only in case of a default of the buyer. And, in the case of LC, payment has been made on behalf of the customer after receiving the goods.

In the case of BG, payment is made at the non-fulfillment of the transaction between the parties. Whereas the LC payment is made only after the fulfillment of the condition specified.

To learn the difference in details Read here. 

Terkar Capital: Bank Guarantee Provider

At Terkar Capital, we specialize in assisting aspiring entrepreneurs and providing them with seamless funding solutions. While Bank Guarantee is among them. We understand the unique needs and expectations of our clients, and accordingly, we arrange and offer a wide range of financial products. Our team of experts is dedicated to guiding clients through every step of the funding process, ensuring their success while maintaining strict confidentiality.

How to qualify for a business loan in India?

 

FAQs to qualify for a business loan in India

Business loans are loans taken by businesses or corporations without collateral. These loans are convenient for businesses to manage emergency monetary requirements. The procedure to get Business Loans in India is easier and quicker. Thus your loan will be sanctioned faster. Here are some frequently asked questions by our customers:

What are Business Loans?

Businesses today face several challenges. One of those challenges is the requirement of collateral for getting a loan from financial institutions. Many small and medium-scale businesses today do not have collateral for loans. These businesses can take a Business Loan. An unsecured business loan is given solely upon the creditworthiness of the businessman borrower. To be eligible for an unsecured business loan, the borrower should have a good credit rating, a good credit history, and a good cash flow.

Why should you take a Business Loan?

• Helps your business grow at a faster pace

By taking a business loan your business can grow at a faster rate. You can also finish any stagnant projects or ventures with the help of a business loan.

• The value of the loan is not dependent on the collateral

When applying for a secured loan, the amount of the loan is dependent on the collateral being used. But while taking an unsecured loan, you may get a bigger amount of money because the lender is making decisions on the basis of your cash flow, credit profile, the health of your business, and so on.

• Faster Disbursement of Loans

As a business loan does not require collateral, the disbursement of the business loan is faster. The financial institution checks your documentation, proposal, and track record and then sanctions the loan. Less paperwork is required for unsecured business loans.

• Repayment in EMI

You can repay the business loan in the form of EMIs. The interest rate will be applied to the EMIs over the term of the loan.

• No risk to your assets

An unsecured business loan is a loan where no collateral is necessary. Thus, all your assets are safeguarded from any risks.

Eligibility Criteria for Business Loans

The Eligibility criteria for a business loan may differ depending on various financial institutions and the situation of the business. Here is a list of the general eligibility criteria for a business loan:

1. The business must have its previous year’s financials duly audited by a CA.
2. Borrowers must have a good credit rating in order to qualify for an unsecured business loan.
3. The business should have a vintage of at least 2 years.
4. The business needs to have its Income Tax returns filed for at least the past 1 year

How do you get a Business Loan in India?

Business Loans can be defined as loans given to businesses and corporations against any kind of collateral. It is one of the most convenient financial products for businesses to manage the emergency conditions of the business.

• Assessing the requirements of the client

We at Terkar Capital will first understand the requirements of the client. We will also talk to the client about the future of their business, their plans to expand, restructure so on, and so forth. After assessing the requirements of the client, we will make an application for the business loan.

• Application and Documentation

Many business people have experienced the tedious nature of the documentation that needs to be done for the bank loan process. We at Terkar Capital take care of the documentation. We understand what stakeholders require to disburse the loan to our clients.

Once we receive the required documents we analyze the financials of the company and choose the financial institutions that best suit the client's requirements. This helps to avoid unnecessary inquiries to cibil and mess up while raising the finance.

 

Get your loan

After your proposal and documentation have been reviewed by the financial institution, your loan will be sanctioned. During the process, whenever the financial institution is in need of any clarification or any documentation we arrange for them. Our association with the client doesn't stop with the disbursement of the amount, rather it starts. We make sure the client should not have any problems while dealing with the respective financial institutions during the loan tenure.

 
What are the Documents Required for Business Loans?

Business loans are one of the most convenient types of loans for growing businesses. The documents required for Business Loans differ from one financial institution to another and as per the constitutions of the business. Reach out to us for documents usually required for a Business Loan.

Working Capital Financing & its Benefits

Working Capital Financing & its Benefits

When a business needs money to cover expenses such as day-to-day operations, Purchase of raw materials, wages, electricity bill payment, payroll, etc., rather than the purchase of equipment or machinery, such financing is known as Working capital financing. This is a very common type of financing for the business which does not have a consistent cash flow and also for the companies that are in a growing stage and are taking up larger projects than usual.

Generally working capital comes into the picture whenever there is a gap between debtors and creditors cycle. For e.g. You’re the manufacturer of the X component which is used for 2-wheeler assembly. In order to manufacture this X component you need to purchase the raw material, and probably you need to pay upfront to purchase the raw material. However, the conversion of that raw material to cash may take the time of 45 days. In this case, you need the working capital to bridge the gap between the purchase of raw materials and the sale of the finished products.

It is a simple solution business that helps in keeping up with the work cycle. Working Capital is the difference between the company’s current assets and its current liability. It is one of the very flexible options to opt for as it proceeds with minimum documents and in a short span of time. One can opt for working capital finance in both secured and unsecured ways depending upon the availability of collateral.



Cycle for working capital finance

Working Capital Cycle refers to the time period required to convert the net assets and liabilities into cash. The working capital cycle always shall be short, easier it is for companies to free their blocked cash. If the turnaround time of conversion into cash is higher, the requirement for working capital will be higher.

Types of Working capital Financing

There are various types of working capital loans available from which a business can select as per their requirement. Most banks offer similar types of Working Capital Loans. These are:

Overdraft Facility or Cash Credit


Bank Guarantee


Bill Discounting


Letter of Credit


Invoice Factoring


Benefits of Working Capital Financing



Working Capital financing can help businesses to boost their day-to-day activities and meet the short-term requirement of the business.


The businesses can eliminate the collateral and opt for an unsecured working capital loan as it is not always justified to put your assets at risk. This will eliminate the requirement of collateral and the business will be able to flourish in its operations.


The procedure of getting a working capital loan is very flexible and you can easily apply at Terkar Capital to get the best solutions for the funding. As a result, the process will get easier and funds will be disbursed faster.


Working capital finance helps you to maintain a good cash flow of the business which in turn results in strengthening the financials and gaining stability in the business whenever there is an unexpected requirement.


Working capital financing offers a very flexible and easy repayment option. It also fulfills cash requirements in an emergency period. So working capital finance gives much-needed leverage to the business to take up the risks.



Why Terkar Capital?


Working capital is one of our services where we have expertise. At Terkar Capital we offer a wide range of services to clients. We will always be ready to serve you with all your requirements in the best possible ways. Terkar Capital has expertise in market strategies that provide the working capital facilities at ease. So whenever it is funding, Terkar Capital is ready to serve you at best!

Understanding Corporate Finance in India

Corporate Finance

All the corporates in India are in constant need of funds for operating their businesses. Corporate finance is the area of finance that deals with raising the finances of companies and assists in capital creation and development of the corporation. Corporate finance manages financial decisions that affect operations like Capital Budgeting, Capital Raising, Investment Decisions, etc.

The finance of the company can be raised in two ways, i.e., Debt and Equity finance. Equity funding is generated by selling shares of the company and reinvesting the same amount. Whereas, Funding through debt happens when a company borrows money and agrees to pay it back to the lender at a later date. The debt capital is further divided into 2 major parts i.e., Unsecured funding and Secured funding.

If you are looking for a corporate funding solution, Terkar Capital can be the appropriate platform for raising finances from both debt and equity funding. We provide secured as well as unsecured funding options to our customers and suggest the best suit according to the financials. Below is the list of a few of our solutions:

Secured Funding

Secured funding is a type of loan where the borrower has to keep collateral of assets or security against the loan. The borrower here does not have personal liability for the loan. The period of the loan offered in secured is high with a low rate of interest. In case of default, the lender has the right to put the asset or security pledged on auction and recover the amount from it.

1. Loan against Property(LAP): 

As the name suggests, a loan against property is the most secure type of loan for lending institutions and the most easily available one for borrowers in normal circumstances. It is generally a long-term loan that needs collateral security against loans.

2. Working capital Finance: 

Working capital is the difference between the company’s current assets and its current liability. One can avail a loan against working capital which helps in short-term operations like paying dues or expenses, utility bills, etc. Hence, Working Capital Loan allows one to run their operations smoothly and efficiently. Working capital is available in both secured and unsecured ways.

3. Machinery loan: 

All manufacturing companies require machinery to manufacture the products which may have huge costs. In such a case, a machinery loan is something that acts as a savior for your business. The machinery loan is available in both secured and unsecured ways which are taken for purchasing new machinery.

4. Builder Finance: 

It is a loan to the builders or developers for constructing or developing residential or commercial property. Being long-term finance, builder finance comes under secured funding. The collateral of such a loan will be the land against the property being acquired or developed. Generally, lenders prefer those builders who have been in this construction field for many years and have a good CIBIL rating.

5. Lease Rental Discounting(LRD): 

LRD is a loan that is offered against rental receipts of the borrower which are derived from lease rent contracts from the clients. The loan is provided to the lesser based on the discounted value of the rentals and the value of the property.

6. Debt Syndications: 

It occurs when a borrower requires an amount that is too large for a single lender to provide, hence there is a group of lenders. The lenders in debt syndication share the risk only exposed to their portion of the loan.

7. Foreign Currency Funding: 

It is when the borrower wants to fund across the borders, i.e., a foreign country, and hence the borrower as well as the lender deals in foreign currency only.

8. Sugar Pledge Loan: 

The time gap between production and sales of sugar is high and hence, they can face a crunch in working capital and sugar industries can get loans against them.

9. Project Finance: 

Project finance means a loan obtained for fulfilling the finances of the new project, the new project can be used for expansion, reconstruction, etc. Here, the project itself is kept as collateral and the loan amount has to be paid after the completion of the project and once the borrower starts generating revenue.

Unsecured Funding

As the name suggests, unsecured loans are loans where the collateral security is absent, and the loan is provided based on the CIBIL score. This type of loan is taken by businessmen to overcome their short-term inconsistencies in the business such as payment to suppliers, shortage of working capital, unsettled invoices, and many more. The Rate of Interest is comparatively high because of the absence of collateral.

1. CGTMSE: 

Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) is an unsecured loan for micro and small enterprises to help small businesses grow in a competitive market and assist entrepreneurs to build their businesses and avail of collateral-free loans easily and conveniently.

2. Trade Finance: 

Trade finance makes it possible and easier for importers and exporters to transact business through trade. Trade finance signifies financing for trade, and it concerns both domestic and international trade transactions. This is one of the suitable financial instruments we can use while dealing with an international customer for minimizing financial risk.

3. Bill Discounting: 

Discounting of the bill can be defined as the advance selling of a bill or invoice to an intermediary before it is due to be paid about certain criteria. A major aspect of bill discounting is that it will help in resolving the crunch of working capital.

4.  Factoring: 

It is the financial instrument or debtor finance in which the seller sells its accounts receivable to a third party called ‘factor’ at a discount. There are three parties involved in such a transaction: a seller, a buyer, and a factoring company. In simple words, it is selling unpaid invoices for the requirement of instant cash.

5. LC Discounting: 

Letter of Credit/Line of Credit is the guarantee by the bank to purchase the bills of the exporter and in return make him the payment. LC Discounting is the facility provided by banks, NBFCs, or Financial Institutions.

Importance of Corporate Finance:

1. Raising Capital: 

Corporate finance means raising the finances of the existing company by debt or equity which is required for running the business efficiently. The need for funds can be for making expansions and diversification in business, payment dues, etc.

2. Research and Development: 

Finance is a crucial aspect of the business, it is also required for undertaking research and development which enhances the functioning of a business organization.

3. Smooth Running of Business: 

For a business to run effectively, there should be proper legal and other compliance like paying dues and taxes on time, which is again developed by corporate finance.

Steps/Process in Corporate Finance

1. Interaction with the client: 

The foremost step in this process is interaction with clients and knowing about their company’s financial condition, i.e., the requirement for finance, product/instrument for raising finances, etc. The process starts with a discussion of clients' requirements and their expectations and ends after disbursing the loans. We arrange the best possible product and provide an easy process throughout. Also, our team of experts guides the applicant in every stage.

2. SWOT analysis of the company: 

It is important to know the strengths and weaknesses of the company, which will help us to draw the analysis of raising finances. Not only strengths and weaknesses but overall analysis of the company is essential to exactly understand which funding to go for.

3. Inspecting the market options: 

After understanding the overall aspects of the company, we check the conventional and non-conventional factors and suggest the best suitable option for them. We discuss the overall process in-depth with clients and make them understand it thoroughly. Here, we check the eligibility of the client, and the overall documentation procedure is undertaken.

4. Approval of Finances: 

We arrange the meetings with lending institutions and take their approval, which ultimately starts the loan procedure i.e, sanctioning of the loan. These arrangements are settled by our team, which finally leads to easy disbursement of funds. Our journey doesn’t end here, we make sure that the suggested product suits the client’s interest, and the client should be in an adequate position to return it within a specified period.

Why choose Terkar Capital?

Terkar Capital is a corporate finance company in India. We are one such financial firm that provides both secured and unsecured business loans in Pune, Mumbai, and across India. Our timely execution and professional services make us different from others. We understand the borrower's needs, strengths, and weaknesses and work hard to provide the best services. If you are looking for corporate finance assistance, here we are!