Bank Guarantee

What Is A Bank Guarantee

A bank guarantee is a written undertaking issued by a bank in favor of the receiver of the goods or services, whereby it pledges to make certain payments on behalf of its client if the latter fails to make a payment or to carry out specific functions in terms of the commercial contract. The bank’s commitment is legally independent of the underlying commercial contract.

A guarantee (bond or suretyship, as it is sometimes called) supports commercial contracts by providing trading partners with the flexibility to reduce credit and performance risk. It is a supplementary agreement or form of collateral or security relating to a specific transaction, for example:

  • A seller may not be able to assess a buyer’s ability to pay for goods or services rendered and wants protection against non-payment.
  • The buyer questions the seller’s financial capability, resources, and ability to perform under the commercial contract and needs protection against non-performance.

Parties to A Guarantee

Guarantees usually involve a minimum of three parties :

The beneficiary – the person in whose favor the guarantee has been issued, who requires security against the risk of the principal’s non-performance or default under the primary contractual obligation.

The applicant – applies for the issue of a guarantee which covers a particular performance by him. The applicant can expect to be informed in writing why and how he is in breach of contract.

The guarantor – the bank or party that issues the guarantee on behalf of the applicant. The guarantor is usually the applicant’s bank which is situated in the same country as the applicant.

Service & Limits

  • We can provide a bank guarantee to any company which needs it.
  • We provide the funds needed.
  • The company will only need to pay the initial fees and give a guarantee for the payments of interest due on the bank guarantee and pay it.
 
 

OUR LIMITS

  • Amount maximum of the one Bank Guaranty (BG) :
    • 500 000 000 USD or Euros
  • The bank guarantee is issued by one of the ten top world banks.

Types of Guarantee

Bid bonds

A bid bond or tender guarantee is a safety mechanism that discourages companies from submitting a tender only to :

  • Withdraw from the tender before its expiry
  • Attempt to amend the tender
  • Refuse to sign the contract when awarded to them
  • Fail to furnish the required performance bond or other guarantees.

These guarantees are also called penalty bonds because the successful tenderer foregoes the amount of the guarantee should he default.
Bid bonds are also used as surety that the tendering company has the finances and the capabilities to undertake the contract.
The validity of the bond extends from date of issue to the signing of the contract or issuance of the performance guarantee.
Once the tender has been awarded, the bonds of the unsuccessful bidders are returned for cancellation.

Types Contd.

  • Retention guarantees

    Under the primary contract, the beneficiary is permitted to retain a certain percentage of the payment due to the principal as a safeguard against latent defects. In order to secure the release of these retention monies, the applicant will apply for a retention guarantee.
    Nevertheless, it does assure reimbursement to the beneficiary in the event of the applicant’s non-performance after the completion of the contract. Retention bonds aid applicants experiencing cash flow problems.

    Warranty bonds/maintenance bonds

    This type of guarantee is designed to protect the beneficiary by covering the cost of any defect or malfunction which might manifest itself after the completion of the project. The guarantee remains in force for the duration of the maintenance and warranty period as specified in the contract between the beneficiary and the applicant.

    Overdraft guarantees/banking facilities

    An overdraft guarantee is issued to secure banking facilities granted by a foreign bank to an offshore subsidiary of a company requiring working capital or general banking facilities.

    Lending-related guarantees

    A lending-related guarantee is an undertaking by the bank to fulfill a specified monetary obligation in the event of default by the offshore subsidiary of a company on whose behalf the guarantee is made. For example, it could guarantee the repayment of a foreign loan taken out by an overseas office of a company concerned.

Performance bonds

When a contract has been awarded, a performance bond is usually required, which guarantees the performance under the contract from commencement to completion.
The bank issuing the performance bond undertakes to pay a specified sum of money to the beneficiary if the applicant does not fulfill the contractual obligations.
Depending on the nature of the contract, it may be to the applicant’s advantage to have separate performance bonds for each stage of the contract. The validity period extends to the completion of the contract.

Advance payment guarantees

These guarantees protect a beneficiary who makes an advance or progress payment to the applicant. A refund of progress payment is guaranteed if the applicant does not fulfill the terms of the contract.

Types Contd.

Shipping guarantees

This is undertaken by a bank to indemnify the shipping company against any liability that arises as a result of releasing imported goods to the consignee without the documents of the title (bill of lading). The indemnity could incorporate the cost of the goods, freight charges, legal costs, and more.
A shipping guarantee enables the consignee to obtain the release of the goods from the shippers, so as to avoid inconvenience and financial loss such as demurrage charges, where goods arrive before the documentation. A shipping guarantee remains in force until the original bill of lading is produced.

Airways releases

A customer requires an airway release so that the cargo or parcel superintendent at the airport can release air freighted goods consigned to the importer. The same conditions apply as for a shipping guarantee, except that it can be canceled upon proof of payment of the import.

A standby letter of credit

This has wording similar to that of other documentary credits but has the qualities of a demand guarantee as it provides the beneficiary with the security of payment.

Negotiating guarantees

When negotiating contracts involving guarantees, you are urged to liaise with the nearest International Trade Services office, which can advise you on the type of guarantee to meet your specific needs and assist you with the wording of the guarantee.
Bear in mind that guarantees are subject to credit assessment and in a number of cases, exchange control regulations. In order to avoid unnecessary delays, contact us timorously.