Introduction

The construction industry around the world is highly dependent on funding

  • This is because such funding allows the industry to function properly and execute its large-scale projects
  • In most cases, it is not possible for companies to fund these projects from internal monetary resources. Therefore, they have to look at raising funds from outside
  • However, since the money involved in such projects can be very high, it is important that any external borrowings are secured using financial instruments

One such instrument is bank guarantees. These can be defined as promissory provisions related to a loan

  • In case the borrower defaults on a particular loan, the bank that is furnishing the guarantee can step in and cover the amount that is payable
  • Since the construction industry is highly dependent on external loans, bank guarantees become vital components of the industry

This blog discusses how bank guarantees can help in construction projects

How Bank Guarantee Helps in Construction Projects

  • A bank guarantee is a vital provision that lowers the project risk for the lender. The presence of such a guarantee means that the lender can engage in the lending process with ease
  • In addition to the above, a bank guarantee is also extremely useful for the construction company involved. In case the company chooses to furnish such a bank guarantee, it can get easier access to funds and thereby ensure that its projects are not halted for any reason
  • Another important factor is that construction projects tend to be susceptible to cost overruns. This is because it can be hard to assess the true cost of a large project right at the beginning. Such projects are often dependent on volatile metrics such as labour pay and the cost of raw materials. 
    • Bank guarantees can ensure that the company gets consistent access to funds, thereby minimising the risks associated with the project. In fact, they can also help firms in keeping interest costs in check
  • Similarly, if a construction firm wishes to outsource some part of the project to third party contractors, it would like to have unhindered access to funding. Having a bank guarantee in place means that the company’s funding will not stop and it can continue to hire others without any issues
  • The construction industry is also vulnerable to market changes and volatile deadlines. In case a company chooses to deploy a bank guarantee right at the beginning, it could mean that the potential impact of these risks can be minimised
  • Thus, overall it is clear that bank guarantees are extremely important for the construction industry. At the same time, it is also vital to choose the right financial institution whose terms and conditions are favourable for your business 

Conclusion

  • To conclude, bank guarantees are extremely helpful in construction and infrastructure projects. In case your organisation is unclear about any aspects of business, you can always reach out to the experts. Institutions such as Euro Exim Bank offer customised support to traders in the form of financial instruments and bespoke trade advisory services. Euro Exim Bank offers financial instruments such as Bank Guarantees and Letters of Credit (LCs). Further information about Euro Exim Bank and its key product offerings is available here.