Credit guarantee refers to the assurance of payment of a certain amount of debt guarantee specified by a debtor in its contract obligations.In commercial activities, the use of credit guarantee also has great benefits, especially in the case of large capital projects.
First, credit guarantee improves the credit of the borrowers and allows them to obtain more favorable borrowing conditions. When a borrower has a credit guarantee, the creditor is more likely to provide the borrower with a loan or other financial service, because it knows that the credit does not have to worry about the accumulation of debt or the debt not be paid.
Second, by using credit guarantee, a creditor can better reduce the risks associated with investments, thus reducing its losses. Whether a company or an individual invests in a project, it will have some risk. Under the terms of the credit guarantee agreement, if any damages are caused by the borrower, it can be compensated for the losses by the guarantor.
Third, use of credit guarantee can help to lower the cost of borrowing by improving the credibility of the borrower. A good reputation of the borrower can help to get the loan at a lower interest rate. Therefore, with a credit guarantee, the borrower can reduce the borrowing costs and be more informed on how to manage its finances.
Fourth, credit guarantees can also help to increase the competitiveness of companies by allowing them to compete for different projects. For example, if a project has a limited budget, then the borrower can apply for a credit guarantee, which will allow it to bid for the project at a lower cost, thus increasing its chance of success.
Finally, credit guarantees can also help to protect small businesses from potential liabilities associated with large projects. If a small business borrows money for a large project, it may be difficult to determine the value of the project and to determine the case of default. However, with a credit guarantee, the creditor can make sure that its loan is protected, thus preventing small businesses from taking on more than they can handle.
In conclusion, credit guarantees are very important in the modern business environment. Credit guarantees can improve the credit of the borrower, reduce risks, reduce interest costs, increase competitiveness, and protect small businesses from potential losses. By using credit guarantees, companies can increase their success rate and ensure their success.