What is a bank guarantee?
A bank guarantee is a ‘promise’ to underwrite or make payment to a third party, on certain terms. Often a third party will request a guarantee of payment upon dispatching its goods or services to another party, and a bank can guarantee this payment through a contractual obligation.
Bank Guarantee History and Defintion:
Guarantee stems from the Spanish word ‘garante’, in the 17th Century, meaning a ‘person giving something as security’.
How can a bank guarantee help a business?
A bank guarantee is a generic term and there are several types of bank guarantee that can help businesses.
As an example, say a small client is dealing with a multinational company on a project, they might require some form of promise to have the relevant financial backing to complete that project. A bank would conduct due diligence on the small company and would act as a ‘guarantor’ to the multinational company; ensuring that the small client will complete the project on certain terms.
A bank guarantee is a ‘surety bond’ which is often addressed to a larger institution of corporate by which the bank pledges (and contractually agrees) to pay an agreed amount under stipulated conditions.
Benefits of bank guarantees
- Allows SMEs the ability to reassure end parties the ability to contractually pay and finance larger projects
- They offer financial credibility and creditworthiness which is backed by a bank
- Bonds, Guarantees and Indemnities can normally be issued by Trade Finance Global’s partner network, located in most geographies and markets around the world, specialising in different sectors
- Contracts and terms can be negotiated as guarantees can be paid or issued in different currencies
Types of bank guarantees
1. Tender Guarantee (or Bid Bond)
If you are pitching to a large company for a tender or project, the buyer might want a ‘tender guarantee’ to show that you’re a serious potential candidate.
2. Advance Payment Guarantee
If you ask the buyer for up front deposit or part payment (often 10-20% up front of the contract price), your buyer might want reassurance of repayment if the contract terms aren’t fulfilled, or they default. A bank can offer this as an Advance Payment Guarantee, which acts as an insurance to return the deposit if the contract defaults.
3. Performance Guarantee
When working to tight deadlines, the buyer might wish to charge penalty fees if the terms of the contract have not been fulfilled to the stated deadline. Often the guarantee might still be in place, but an additional fee (or compensation) would be assured by the bank in the case of delays or errors.
4. Standby Letters of Credit
Standby Letters of Credit are also guarantee obligations from a banks within the United States, which forbids financial institutions from assuming guarantees, so where a bank guarantee might not be issued, a SLC is used in its place.
Bank guarantee eligibility: What do applicants have to do?
Applicants need to demonstrate financial credit worthiness to their bank, or the bank offering to guarantee payment to another party in order to access a guarantee.
The bank would normally look at previous trading history, recent accounts, credit history and liquidity. The bank would normally need to know how long the bank guarantee is required for, the amount and currency, beneficiary details and any other conditions that might be required. A bank might ask for some security over the guarantee (e.g. liquid assets such as property or equipment it holds, and maybe a personal or directors guarantee).
Here is an example of a Bank Guarantee, for illustrative purposes only, details have been removed:
Want to find out more about how a Bank Guarantee could work for your business? If you’re looking for a funder or bank to provide some form of guarantee or act as a guarantor on behalf of your company to allow you to fulfil larger contracts, offer confidence to an end buyer and grow, get in touch with our team or fill out the form here.