Bank Guarantees (BG) are negotiable financial debt bank instruments made by a guarantor bank on behalf of the applicant to mitigate risk on behalf of the beneficiary party. It may be used to assist in trade finance, international trade, domestic trade, and various other types of contracts where the backdrop of a vetting third-party (the issuing bank) could be used.
When a bank issues a Letter of Guarantee to a beneficiary bank it looks at the credit worthiness of the applicant, not the transaction at large. Thus the ability to acquire bank instruments like a Bank Guarantee largely is based on the relationship it has with its client.
The BG is very similar to that of a LC in that it guarantees payment on behalf of its client to the beneficiary. However, a Bank Guarantee is usually used in the event there is default. If for instance a purchaser of goods issues a BG to the seller of goods and if after delivery payment were not made for some or the entire contracted amount, these bank instruments acts like a draft or check allowing the Beneficiary to cash it in.