An undertaking by a bank to pay a party (the beneficiary of the bank guarantee) an amount (up to a specified maximum amount) if and when another party (the applicant of the bank guarantee) defaults on its payment obligations under an underlying contract.

Bank guarantees are similar to performance bonds and the terms are sometimes used interchangeably. However, generally bank guarantees are usually issued to secure the applicant's monetary obligations while performance bonds are issued to secure its non-monetary obligations.

A bank guarantee may be used as an alternative to a company offering security for a debt itself. A bank guarantee will usually result in the bank taking security over the applicant's assets.