Introduction to Guarantees

TFG Guarantee Guide

Trade Finance Global / Introduction to Guarantees

Introduction to Guarantees

A bank guarantee is a formal assurance from a lender or a financial institution that a borrower will be able to pay its counterparty, irrespective of any financial circumstances. This guarantee, assures a third party that payment will be made, even if the borrower cannot repay the debt. Doing business with companies abroad is not the same as doing business with national companies. For parties involved in international transactions, there can be unpleasant surprises, which makes it difficult for them to meet their contractual obligations. Therefore, both parties will often require some form of security, such as a guarantee.

A Guarantee is a simple and practical way of ensuring that a business – or its trading partner – receives compensation in the event of a breach of contract.

Featured Insights

Independent vs. accessory guarantees - a tale of two cases- Shanghai Shipyard and Bank Audi Independent vs. accessory guarantees – a tale of two cases: Shanghai Shipyard and Bank Audi ✍️ In this article, Carter Klein of Jenner & Block talks about independent vs. accessory guarantees, corporate guarantees in the US, and the cases of Shanghai Shipyard and Bank Audi.
Technology for humans: the potential of open-source digital platforms to unlock trade finance liquidity Technology for humans: the potential of open-source digital platforms to unlock trade finance liquidity With technology revolutionising almost every area of business, TFG asked a number of fintech experts whether it also has a role to play in streamlining how trade finance applications are handled and processed to help unlock more trade finance liquidity.
Russia Ukraine crisis impacting payment defaults commodity finance and credit insurance Russia-Ukraine crisis impacting payment defaults, commodity finance, and credit insurance Robert Meters, director of Schumann International Limited, discusses the current and long-term impacts of the conflict on receivables finance and credit risk management.

Latest Insights

Aspects of a Guarantee

A Guarantee can take many forms and include different aspects. Below are some typical aspects to bear in mind when creating a Guarantee.

The conditions in the home country of your trading partner

You must be aware of the conditions in the countries you trade with and ensure you make your own country’s conditions clear before signing a contract. The obligations in your own country will not necessarily match those in other countries. For example, in some countries it is normal to ignore the expiry date of a Guarantee. Furthermore, local law might also require that the Guarantee is issued by a local bank against counter indemnity by a bank in the exporter’s country.

Importance of the order

The order of individual banking transactions is very important with projects abroad. Exporters often require documentary credits as security for payment of goods, while importers require a bank Guarantee to ensure that work is carried out or goods are delivered. So, what should be issued first? The documentary credit or the Guarantee?

Sometimes, importers make a claim under an issued Guarantee, i.e. require payment under the Guarantee because of a breach of contract, before the exporter even sees the documentary credit. This can be avoided by including the Guarantee as one of the documents required under the documentary credit, that is, by making the Guarantee subject to the terms of the documentary credit.

Payment under a Guarantee

It is important that you and your trading partner agree on the terms for meeting claims under the Guarantee. Should payment take place against a simple declaration of breach, which makes the Guarantee payable on first demand, or should the bank wait for a settlement between the parties?

This must be clearly stated in the wording of the Guarantee to let all parties know when a claim must be met. In some cases, it will be necessary to ask for advice with respect to the wording of the Guarantee.

Parties to a Guarantee

There are several parties involved in a Guarantee:

  • The Applicant i.e. the party requesting the Guarantee
  • The Guarantor i.e. the bank that guarantees the agreed compensation amount to be paid in the event of a failure to meet contractual obligations
  • The Beneficiary i.e. the party for whom the Guarantee is issued

Access trade, receivables and supply chain finance

We assist companies to access trade and receivables finance through our relationships with 270+ banks, funds and alternative finance houses.
Get started

Videos - Guarantees

Download our free SME trade finance research


Download the 2022 export finance guide


Contents – Guarantees Hub

Access trade, receivables and supply chain finance

We assist companies to access trade and receivables finance through our relationships with 270+ banks, funds and alternative finance houses.
Get started

Speak to our trade finance team

Latest News

22Aug

Lloyds bank completes first digital promissory note purchase via Enigio’s trace:original platform

0 Comments

Lloyds bank announced that they reached a key milestone in digitising trade by completing the UK’s first digital promissory note… Read More →

29Jul

EBRD contributes €20 mn to Greek developer’s first green bond

0 Comments

The European Bank for Reconstruction and Development (EBRD) has invested €20 million into a 7-year €230 million green bond issued… Read More →

28Jul

What is structured trade finance (STF)?

0 Comments

Structured trade finance is a type of debt finance that structures trade finance products from across the supply chain together…. Read More →

22Jul

State Bank of Pakistan introduces exchange controls as dollar soars

0 Comments

In a bid to curb declining forex outflows, the State Bank of Pakistan (SBP) introduces exchange controls and limited imports…. Read More →

20Jul

The difference between SWIFT messaging types: MT799 and MT760 [UPDATED 2022]

0 Comments

The SWIFT MT 799 and SWIFT MT 760 are both widely used in trade finance but have some important differences…. Read More →

11Jul

Gunvor increases its off balance sheet revolving credit facility to $990m

0 Comments

Gunvor Group Ltd has signed a $990 million Off Balance Sheet Instruments (OBSI) revolving credit facility.  This has been enacted… Read More →

About the Author

Trade Finance Global (TFG) assists companies with raising debt finance. While we can access many traditional forms of finance, we specialise in alternative finance and complex funding solutions related to international trade. We help companies to raise finance in ways that is sometimes out of reach for mainstream lenders.

Back to Top