What are Corporate Credit Cards? – Different Types of Cards
April 3, 2025
Credit cards have been a great financial innovation that has revolutionized personal banking. As far as retail banking is concerned, credit cards offer one of the best returns on investment for banks. Credit card divisions at most banks have been growing at a rapid pace. Over time, commercial banks realized that there is no need…
Banking activity is generally considered to be risky. Banks earn money by borrowing money from people and then lending them to other people at a higher rate of interest. However, commercial banking activity is considered to be even riskier. This is generally because of the huge dollar value of the transactions in commercial banking. Hence,…
The business model behind commercial banking practice has completely changed over the years. Earlier, commercial banks were heavily dependent upon branch banking. Branches that served corporate customers were thought of as being an asset. As a result, it was common for corporate banks to advertise these branches to prospective clients. However, over the years, the…
In the previous article, we have already studied what bank guarantees are and how these bank guarantees are provided by a commercial bank as a value-added service to their corporate customers. We are also aware of the various types of bank guarantees as well as their purposes. In this article, we will understand some of the pros and cons which are associated with bank guarantees.
Commercial banks provide bank guarantees to a large number of corporate clients. These bank guarantees provide significant revenue to commercial banks. These guarantees are available to corporate customers because of some benefits. An indicative list of some of these benefits has been mentioned below:
Banks generally charge anywhere between 0.5% to 1% of the amount that they guarantee. Thus, the transaction costs are low and not an impediment to the overall conduct of business. These lower costs enable companies to produce goods and services at a better price.
Since no advance payments are required, the working capital requirement is reduced and this positively impacts the overall cost of capital. Hence the cost of operations for the business is lowered because of better cash flow management which is made possible by bank guarantees.
There are certain disadvantages that are associated with bank guarantees as well. It is important for corporations as well as commercial banks to understand these cons before making any final decision.
In such countries, there are too many regulatory hassles for obtaining bank guarantees. Hence, banks are not willing to offer their guarantees in such countries and even corporations refrain from availing of them.
After all the points are considered, one can say that bank guarantees provide more advantages than disadvantages. This is the reason why they are extremely popular amongst the business community in most parts of the world.
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