Types of bank guarantee: performance, financial, bid bond and more

Types of bank guarantee at a glance

Every bank guarantee (BG) works the same way. A bank promises a beneficiary that it will pay if its customer fails to perform or pay (RBI notification). What changes from type to type is what the promise secures. Banks use these names when they publish their charges, so they are the labels you will meet in a sanction letter.

Performance bank guarantee

A performance guarantee protects the party who relies on you to deliver. If you fail to complete the contract, the beneficiary can invoke it and the bank pays up to the amount of the guarantee. It is the most common type for contractors and suppliers.

On Bank of Baroda's published card for inland guarantees, a performance guarantee for a borrower that is not a large corporate was priced from 1.00% to 2.40% a year for guarantees up to three years, by rating. MSME accounts without a rating were priced as BBB, which is 2.00% (Bank of Baroda). The card shows an effective date of 10-Dec-2022 and is an example, not an offer. The bank guarantee charges page has the full card.

Financial guarantee

A financial guarantee secures a payment obligation. The beneficiary is paid if you do not pay what you owe. It costs more than a performance guarantee on the same card. At the BBB level, it was 2.65% a year against 2.00% (Bank of Baroda). Each bank sets its own pricing by type.

Bid bond and bank guarantee in tender

When a government body or a large buyer invites tenders, it often asks each bidder for a bid bond, also called an earnest money bond. It is a bank guarantee that you will honour your bid if you win, for example by signing the contract and furnishing a performance guarantee. If you withdraw, the beneficiary can invoke it.

A bank may price a bid bond differently. Bank of Baroda's card for export bid bonds says the bank recovers 25% of the commission at issue for the full validity. If the bid materialises, it recovers the other 75%. Otherwise it refunds the commission already collected (Bank of Baroda). Rules vary by bank and by type of bond, so ask yours.

Advance payment guarantee

When a buyer pays you money before delivery, it may ask for a guarantee that you will deliver or return the advance. The bank guarantees the sum. Bank of Baroda lists guarantees for advance payments made by foreign buyers to Indian exporters or contractors among its export performance guarantees, alongside bid bonds and earnest money bonds (Bank of Baroda). With ECGC cover to the extent of 75%, its card showed 1.25% a year including ECGC premia. With 90% cover, it showed 1.30% (Bank of Baroda).

Deferred payment and shipping guarantees

A deferred payment guarantee covers the import of goods into India, or repayment of a foreign currency loan, on deferred terms. Bank of Baroda's card showed 0.50% per quarter or part of a quarter for the specified period (Bank of Baroda).

A shipping guarantee lets an importer collect goods before the original bill of lading reaches the bank. On the same card, it was a flat ₹1,000 for imports under LCs the bank had opened. In other cases it was 0.05% a month for the period, with a minimum of ₹1,000 (Bank of Baroda).

Export performance guarantees that are not project exports

Bank of Baroda's card also prices export performance guarantees other than those for project exports. They cover bid bonds, export obligations and guarantees linked to deemed exports. The card showed 0.10% a month for the specified period, with any part of a month counted as a full month. If the guarantee is returned more than three months after issue, 50% of the commission for the unexpired period is refunded (Bank of Baroda). As elsewhere, treat this as one bank's example.

Common mistakes when you choose a type

1. Asking for a financial guarantee when the beneficiary wants a performance guarantee, or the other way round.
2. Taking a bid bond for a longer period than the tender needs.
3. Forgetting that a bid bond often has to be followed by a performance guarantee if you win.
4. Not asking the bank how its commission differs by type.

What every type has in common

RBI's Non-Fund Based Credit Facilities Directions, 2025, set the same core for all guarantees (RBI notification):

• the guarantee must be irrevocable, so the bank cannot cancel it alone;
• it must be unconditional, with no clause that stops the bank paying promptly;
• it must carry a clear way to honour it "without demur" when invoked;
• the bank must pay as the deed provides, unless a court order restrains it; and
• the bank's policy must cover invocation, claim period, the period of the guarantee, fees, release of security and renewal.

Bank guarantee format: what a guarantee deed contains

Each beneficiary has its own preferred wording, and the bank issues the deed on its letterhead or electronically. Whatever the format, a deed normally states:

1. the bank, the applicant and the beneficiary;
2. the amount, in figures and words;
3. what the guarantee secures, such as a named contract, tender or invoice;
4. the date it takes effect and the date it expires;
5. the claim period, which is the extra time after expiry within which the beneficiary may still make a claim;
6. how a claim is made, with the documents the beneficiary must send; and
7. the bank's promise to pay when a valid claim arrives.

The exact clauses come from the bank and the beneficiary, so ask both for their format before you apply. Banks may issue electronic guarantees. Each such bank must have a written procedure to keep manual handling low (RBI notification).

The bank guarantee process

1. Agree what is needed. Find out the type, amount, period and wording the beneficiary wants.
2. Apply to your bank. Give the draft wording, the contract or tender, and your financials.
3. Bank assessment. The bank checks your limit, repayment record and security. It asks for a margin, which can be a cash deposit.
4. Issue. The bank issues the guarantee and collects commission, for the period including any claim period (Bank of Baroda).
5. Monitor. Diarise the expiry and claim dates. Renew if the contract runs on.
6. Release. When the beneficiary returns the original or releases the guarantee in writing, ask the bank to close it and release your margin and security.

Which type do you need?

• Bidding on a tender: a bid bond, then a performance guarantee if you win.
• Taking a buyer's advance: an advance payment guarantee.
• Promising to pay a third party: a financial guarantee.
• Importing and clearing goods before documents arrive: a shipping guarantee.

Capnix does not issue bank guarantees. Banks do. Capnix can take a trade requirement to the lenders on our lender panel. See the trade finance product page, read the bank guarantee page for the basics, or begin with the free loan readiness check and a Capnix score from 0 to 100.