WHAT IS A BANK GUARANTEE? (BG)
A Bank Guarantee (BG) is very similar to a Letter Of Credit (LC) as they both are used for many types of business transactions (financial or performance based).
The real difference between the two is that a Letter Of Credit (LC) ensures that a business transaction goes as planned, whereas a Bank Guarantee (BG) reduces losses if a business transaction doesn’t go as planned.
A Bank Guarantee (BG) guarantees a certain sum to the beneficiary if the opposing party doesn’t fulfill its specific obligations under their agreed upon contract.
Bank Guarantees (BG) ensure both sides in a contractual agreement from credit risk.
A construction company and its steel beam supplier may enter into a contractual agreement to build a new complex.
Both sides might have to issue Bank Guarantees (BG) in order to prove their credit-worthiness to each other.
In a case that the steel beam supplier fails to deliver steel beams to the job site per their agreed contractual agreement, the construction company would notify the issuing bank of the breach of terms agreed up in the Bank Guarantee (BG) and the bank would then pay the construction company the amount agreed upon in the Bank Guarantee (BG).
HOW DOES THE BANK GUARANTEE (BG) PROCESS WORK?
Bank Guarantee Closing Process
Step 1: Application
Fill out and return the Bank Guarantee (BG) application with the documents for your deal. (Contract, Agreement, etc.)
Step 2: Issuing of Draft
A SWIFT MT760 draft of the Bank Guarantee (BG) will be created for you and your beneficiary to review.
Step 3: Draft Review and Opening Payment
a) Finalize the draft between you and your beneficiary and sign off on the draft (changes are free of cost).
b) We issue you a payment invoice for the BG, which you arrange to pay.
c) Once we receive your wire payment, we will release the finalized Bank Guarantee (BG) to the bank for issuance and delivery.
Step 4: Issuance
More often than not, the bank will issue the Bank Guarantee (BG) within 48 hours of release.
Once issued, a copy of the BG will be emailed to you as it is transmitted by a MT760 SWIFT message to the beneficiary, including the reference number of the BG.
Your seller’s bank will be able to receive and confirm the Bank Guarantee (BG) transmission soon thereafter.
WHAT ARE TYPES OF BANK GUARANTEES? (BG)
1. Bid Bond Guarantee:
Is issued as part of the bidding process between a contractor and the project owner, in order to guarantee that the winning bidder will undertake the contract under the term sand conditions that they bid.
2. Performance Bond Guarantee:
A surety bond usually issued by a bank to guarantee the satisfactory completion of a project by a contractor.
Also known as a contract bond.
3. Advance Payment Guarantee:
Is utilized whenever a contract includes advance payment to be made to the seller.
It guarantees that this advance payment will be returned to the buyer if the seller happens to not fulfill its obligation to the seller.
4. Warranty Bond Guarantee:
A type of security bond that states that the contractor has a history of trustworthiness.
It also protects the client should the work completed be subpar or unethical in any way.
5. Payment Guarantee:
A financial commitment that requires a debtor to make a repayment due to terms outlined in the debt agreement.
6. Rental Guarantee:
A type of insurance used to protect landlords against loss of rent.
7. Letter of Indemnity:
A letter that guarantees certain contractual provisions will be met or financial reparations will be made.
Guarantees that losses will not be suffered if the contractual provisions aren’t met.
8. Confirmed Payment Order Guarantee:
A guarantee of payment on a certain due date on top of the letter of credit issuing bank’s own commitment to pay the supplier.