Proof of Funds vs. Bank Guarantee: What’s the Difference?

Introduction

Ever tried to seal a big deal — maybe a property purchase or a high-ticket investment — and been asked for either a Proof of Funds or a Bank Guarantee? If you nodded yes (or felt slightly confused), you’re in the right place. These two financial instruments for trade may sound similar, but they serve very different purposes.

Let’s break it down.

What Is Proof of Funds?

Think of Proof of Funds (POF) as a snapshot of your financial readiness. It’s an official document — typically issued by a trade finance bank or financial instruments provider — that confirms you have the necessary capital to complete a transaction.

Whether you’re buying real estate, investing in a business, or participating in import export financing, POF assures the seller or broker that you’re financially equipped to proceed.

According to Investopedia, this document is often requested in high-value trade finance services to verify that a buyer has sufficient funds. Common forms of POF include:

  • Bank statements

  • Custodial account balance letters

  • SWIFT MT799 messages (common in institutional or international trade finance)

In global deals, especially in real estate or trade, sellers might also request a Ready, Willing, and Able (RWA) letter alongside the POF — basically stating, “Yes, I have the funds, and I’m ready to use them.”

What Is a Bank Guarantee?

Now here’s where the role changes.

A Bank Guarantee is not about showing that you have money — it’s about promising payment if something goes wrong. Think of it as a secure payment guarantee from your bank.

As Investopedia notes, a Bank Guarantee is a commitment from a financial services provider to step in and pay the other party if you default. It’s widely used in international trade finance, construction, and large-scale corporate trade finance solutions.

Types of Bank Guarantees:

  • Financial Guarantee – Ensures payment if the buyer fails to pay

  • Performance Bank Guarantee – Ensures services or goods are delivered as promised

Let’s say you’re a new supplier bidding on a contract. The buyer doesn’t know you yet. A Bank Guarantee for payment gives them confidence — if you don’t deliver, your bank guarantee covers the loss.

So, What’s the Key Difference?

Still wondering? Here’s the bottom line:

Feature

Proof of Funds

Bank Guarantee

Purpose

Confirm available capital

Secure payment or performance

Risk Assumed By

Buyer

Bank

Common Use

Real estate, investments

Contracts, trade credit concept deals

Issued By

Bank or POF bank

Bank

Instrument Type

Unsecured financial instrument

Risk management instrument

In short:

  • POF shows you have the funds.

  • BG shows your trade finance bank will pay if you can’t.

You could say POF proves capacity, while a Bank Guarantee provides assurance.

Which One Do You Need?

Here’s the million-dollar question (sometimes literally): Which instrument fits your scenario?

If you’re purchasing something and just need to prove liquidity, a Proof of Funds will likely do. But if you’re entering into a commercial contract — especially involving letter of credit services, documentary collections, or MT700 series instruments — the other party may request the additional assurance of a Bank Guarantee.

💡 Pro tip: Always consult with your trade finance advisory services or banker before selecting either. These are powerful tools — when used right.

Final Thought

Whether you’re showing strength or offering security, both tools can open doors in complex, high-value transactions. So the next time someone asks, “POF or BG?” — you’ll know exactly what they’re asking for… and why it matters.