Overview

Lack of adequate financial resources or inability to manage resources properly is a common struggle for most businesses. Delayed payments, sluggish growth, or massive debt could not only hamper business growth but also prevent potential opportunities that could risk a business’s viability. Therefore, business entities unable to secure funds could use a Bank Guarantee from Axis Bank or any other bank where they have a corporate relation.

Axis Bank Guarantee- Meaning and Purpose

Meaning of Bank Guarantee by Axis Bank Bank

A Bank Guarantee issued by Axis Bank bank is essentially an assurance for repayment in pursuance of a contract between two external parties i.e. creditor and debtor or in furtherance of a guarantee between a customer and the beneficiary. They serve the vital purpose of offering credibility as a viable business via thorough due diligence for the business guarantee.

Bank guarantees from Axis Bank bank are a risk management tool for the borrower since in the case of failure of repayment, the bank assumes debt liability in the event of default by the borrower helping a business to access funds or resources even in circumstances which would otherwise be a little more risk.

Example of how Axis Bank Guarantee Works

For example, when an equipment manufacturing company enters into a contract with a small vendor for supply of certain machine parts worth Rs. 4L. Such a small vendor could obtain a Axis Bank guarantee. If it obtains the Axis Bank guarantee, then the large manufacturing company could make payments in advance with a certain timeline for delivery of products. If the vendor fails to perform his contract-related obligation, the large manufacturer entity could claim losses from the Axis Bank or any other bank that had issued guarantee for the vendor.

Axis Bank Guarantee – Fulfilling Financial Purposes for a Business

In this way, when Axis Bank will not only boost financial credibility of the company but also support and back a small business in its day-to-day operations to enable sustainable growth.

With its vast business acumen and extensive network, the Axis Bank can issue all types of bank guarantee in Indian and international markets.

Types of Bank Guarantee

Generally, HFDC bank guarantees are limited to a specific sum and for a limited period usually pre-determined at the time of entering into a contract. Axis Bank is equipped to issue all types of guarantees through its branches and/or its online platform. Described below are the major types of bank guarantee that can be availed at Axis Bank or any other bank the company has corporate relations with.

Performance-based Guarantee/ Performance Bond

Known as a performance bond or performance guarantee, it is a category of bank guarantee that assures the performance of a contract-related obligation on the part of the borrower as per the agreed terms of a contract specifying the period of fulfillment and the standard of performance as required by the other party.

Hence, the liability for the Axis Bank/financial institution offering a guarantee arises only in the event the contractor fails to perform his obligation on time or the quality of the product fails to meet the requisite criteria. This type of bank guarantee enables the beneficiary to seek compensation for the losses suffered and get financial protection against any potential loss or any unnecessary delays caused due to non-compliance.

For example, where a construction firm has provided a performance guarantee on the timely completion of the project within a pre-agreed timeline but is unable to fulfill its part of the promise, then the client could seek compensation to hire an alternate contractor to fulfill the work on time and ensure no unreasonable delays or any further financial strain on them.

Financial Guarantee

As the name sounds, a financial guarantee is a type of Axis Bank guarantee that assures the creditor of fulfilling payment obligation where the debtor is unable to repay the debts.

Generally, financial guarantees are applied where there is uncertainty regarding the creditworthiness of the debtor and certain assurance is required to enable transaction to mitigate risks. Therefore, such risk factors could be eliminated by bringing a credible third party who reassures repayment and agrees to make good the loss suffered under specific circumstances. In this case the 3^rd part y is the Axis Bank that issues the financial bank guarantee.

For example, where a business entity has submitted a financial guarantee while seeking funds for any specific business project, any failure to repay the loans will lead the bank to step up for repayment of the pre-agreed obligation. Smaller businesses or start-ups with scalable business ideas could benefit from financial guarantees that not only protect the investors but also make them eligible to seek loans which would be a little too risky otherwise.

Bid Bond Guarantee

Generally provided under construction contracts, a bid bond guarantee assures the beneficiary that the bid owner will win the contract and start the project as per the proposed terms, and if he fails the beneficiary will be awarded compensation by the issuing bank, like Axis Bank or any other bank that deals in Bid Bond guarantee.

Advance Payment Guarantee

Where the beneficiary requires certain upfront payments in pursuance of a contract, the advance payment guarantee by Axis Bank or any other bank, assures the return of advance payments to the beneficiary on the failure of the agreed terms.

Benefits of Axis Bank Guarantee

Tool for risk management-

Certain businesses or individuals with insufficient or inadequate credit history are generally not preferred by creditors for extending credit facilities due to the potential risks of default. Thus, a Axis Bank guarantee offers the necessary assurance for repayment and credibility to the borrower minimizing the overall risk associated with the transaction.

Cost efficiency-

Further, Axis Bank bank guarantees are also beneficial in the sense that they are a cost-effective way to augment the creditworthiness of a business and do not cost much. Generally, banks charge a guarantee fee which could be in the range of 0.5-1 percent of the total guarantee fee. Thus, these lower transaction costs do not put any extra burden on the borrower enabling businesses to improve their products/services and grow their business.

Facilitates Trade-

Generally, Axis Bank and other banks do thorough due diligence to verify the financial stability of the business before extending business guarantees which also opens doors to attractive growth opportunities which may not be available to small businesses otherwise. Not only this, Bank guarantees also improve the credibility of the business assuring investors and creditors while attracting potential growth opportunities.

Quick Processes-

Customers having all the requisite documentation could process their Axis Bank bank guarantee application faster. Few banks also promote a quick issuance of bank guarantee within 3 hours. Digitizing the process has also made applying for and receiving a bank guarantee from many banks like Axis Bank bank faster.

Ensures Better Cash Flow Management-

Axis Bank Bank guarantees also do away with any requirement of making payments in advance, which allows sellers to receive prompt payments for the supply of goods or services. This allows the business entities to manage their cash flows in an efficient manner, lowering working capital requirements, minimizing the total cost of capital, and accordingly improving business profits.

Builds Business Goodwill-

Since Axis Bank bank undertakes thorough investigations into the financial health of a borrower business, therefore approving a bank guarantee shows its credibility assuring lenders and investors it will grow over time.

Promotes Trust and Confidence-

Knowing that the banks would have done thorough research on the business entity, the lenders could enter into transactions without any stress. Axis Bank Bank Guarantees add a safety net in the transaction which fosters trust and confidence among the parties.

Drawbacks of Bank Guarantee

Not Accessible for Every Borrower:

smaller businesses or entities going through losses are ineligible to obtain bank guarantees be it from Axis Bank bank or others. This limits their financial flow and credibility for further growth.

Lack of Flexibility:

Since most of the financial guarantee’s sums are pre-determined for a limited period as prescribed in the contract, they are quite inflexible for any changes to be made later.

Complexity in the Transaction:

Including a financial institution in a transaction between borrower and creditor adds complications to the process which could add an extra layer of complexity and bureaucracy.

Time-Consuming Process:

Banks need to do a thorough evaluation of the party at the borrowing including its business model, business viability, financial health, etc. and more before approving the guarantee request. Hence, sometimes the process may be longer and time-consuming.

Difficult to Obtain:

Needless to mention, Axis Bank and other banks may only agree to provide bank guarantees in a seamless manner in cases where a business has robust financials and a viable business model. Therefore, for businesses dealing with financial struggles and witnessing uneven cash flows, or individual or business entities with inadequate or no credit history, the process could be challenging similar to bank loans.

Banks May Seek Collateral:

Many a times, Axis Bank and other banks may also seek collateral from the borrower individual or entity to warrant repayments which may sometimes be as high as the total sum of the guarantee which could discourage borrowers from seeking bank guarantee. In such a situation, the only advantage is that the borrower doesn’t have to liquidate the investment but could pledge to receive funding. Lack of collateral may sometimes also cause banks to reject the application altogether.

Bank Guarantee vs Corporate Guarantee

	Bank Guarantee	Corporate Guarantee
Meaning	A Bank Guarantee by Axis Bank or any other bank, is essentially a promise to honor repayments for debt obligations undertaken by a customer in the event he fails to make repayments within the duration agreed by parties in pursuance of a contract.	A Corporate Guarantee could be defined as a legally enforceable contract under which a third party consents to honor the debt obligation where the debtor fails to repay on time. Generally, Corporate Guarantor is closely associated with the borrower entity.
Types	Financial Guarantee, performance bond guarantee, Bid Bond Guarantee and Advance Payment Guarantee, etc. are all types of  bank guarantee that can be availed from Axis Bank bank or other banks thereof.	Limited Guarantee, Unlimited Guarantee, Conditional Guarantee and Cross Guarantee are the types of Corporate Guarantee.
Number of Parties	Three parties are included i.e. Customer, the beneficiary, and the Guarantor Bank, like Axis Bank Bank.	Three parties are involved namely, the Lender, borrower, and Corporate Guarantor.
Manner of working	Axis Bank Bank Guarantee provides assured compensation for failure of performance of contract terms.	Corporate guarantees assure repayment of the debt to the agreed limit where the debtor fails to repay timely.
Applicability	Axis Bank bank guarantee Could be used either in any business or personal transactions.	Relevant in only business-related transactions.
Liability	Banks like Axis Bank, who have provided a guarantee to a transaction are obligated to compensate for the losses suffered by the beneficiary.	The Corporate Guarantor providing assurance has to compensate the creditor for the damages sustained in the business.
Risk Involved	Banks have a higher degree of risk element as compared to their customer.	The guarantor undertakes a higher degree of risk compared to the borrower entity by putting himself into the position of the borrower.

 Bank Guarantee vs. Letter of Credit

	Bank Guarantee	Letter of Credit
Meaning	A Axis Bank Guarantee is essentially a promise to honor repayments for debt obligations undertaken by a customer in the event he fails to make repayments within the duration agreed by parties in pursuance of a contract.	Letters of Credit or LOC is a financial agreement where the bank agrees to undertake the payment obligation within the prescribed timeline in the event the purchaser fails to make payments.
Liability	Axis Bank or other Banks are responsible for making payments in the event the customer defaults on the repayment or provides compensation where the customer fails to fulfil the terms of the contract.	In terms of LOCs, the bank is responsible for payment and could make payments whenever they are due without any unreasonable delays and later collect the payments from the customer.
How does it work?	Axis Bank Guarantee provides assured compensation for failure of performance of contract terms.	As long as the seller and the buyer adhered to the terms of the contract, the LOCs assure timely payments to the seller.
Number of Parties	Three parties are included i.e. Customer, the beneficiary, and the Guarantor Bank like Axis Bank	LOC transactions have more than three parties involved namely- the Issuer of LOCs (bank), the Customer, the Advising Bank, and the Beneficiary.
Applicability	Applicable for business-related as well as personal transactions.	Letters of Credit are more used in case of transactions such as import- export-related transactions.
Risk Involved	Banks have a higher degree of risk element as compared to their customer.	Customers hold higher risk compared to the bank.

Bank Guarantee vs Personal Guarantee

	Bank Guarantee	Personal Guarantee
Meaning	A Bank Guarantee is essentially an assurance for repayment either through the issuing Axis Bank  or financial institution in pursuance of a contract between two external parties i.e. creditor and debtor or in furtherance of a guarantee between a customer and the beneficiary.	A Personal Guarantee is a legally enforceable agreement where the guarantor (referred to as personal guarantor) consents to undertake the liability for the repayment of debt when the primary debtor defaults on the loan.
Liability	The liability to compensate the beneficiary arises only when the lender fails to make timely payments or perform any performance-related obligation.	In a personal guarantee, the liability to make payment arises where the debtor is unable to repay his debt.
Risk Involved	The degree of Risk Banks have is higher risk than the customer.	Personal guarantees have a higher risk element than conventional guarantees as the event of failure to repay debt may cost his personal assets.
No. of Parties	Bank, Customer, and Beneficiary are the parties to a bank guarantee agreement.	Personal Guarantor, Debtor, and Creditor- are the three parties to a personal guarantee arrangement.

Final Thoughts

Therefore, getting a Axis Bank guarantee helps the beneficiary to minimize risks against any losses or damage happening due to the failure of performance on the part of the borrower. Hence, businesses with a bank guarantee have significantly higher chances to efficient cash flow management, lower working capital costs, better credibility, build long-lasting business relationships and improve their creditworthiness, and grab potential growth opportunities.