A bank guarantee (BG) is a bank's promise to pay if its customer fails to meet a contractual obligation. It is a safety net for the beneficiary — if the deal goes south, the bank steps in and covers the loss.
Example: A construction company wins a government contract worth $10 million. The government requires a performance guarantee of $1 million. The company's bank issues a BG. If the company fails to complete the project, the government can claim $1 million directly from the bank.
Bank guarantees are used extensively in construction, international trade, real estate, and government contracts. Types include performance guarantees, financial guarantees, advance payment guarantees, and bid bonds. Banks charge 0.5-5% of the guarantee amount as fees, depending on risk.