Many times, in a contract or agreement, there is a need for a third party (often a bank) to guarantee to pay a specific amount of money to one party if the counterparty defaults.
By receiving a Bank Guarantee (BG), the guarantee transfers the creditworthiness of the applicant of the guarantee to the guarantor (the bank).
When a bank issues a Bank Guarantee, it agrees only to pay the specific amount in the guarantee to the beneficiary. The bank does not guarantee the completion of a project, delivery of goods and so on.
The Purpose Of A Bank Guarantee
A Bank Guarantee is defined as:
A documentary, independent undertaking by which a bank (the guarantor), issues, at the request of its client, an irrevocable Bank Guarantee (BG) to pay a specific sum of money to a third party (the beneficiary), when certain demand/document(s) are presented.
A Bank Guarantee is mostly utilized as a passive instrument. When issued, it is not expected to be drawn upon, because the applicant and the beneficiary will usually settle the underlying contract/agreement outside of the Bank Guarantee.
The Bank Guarantee remains active until its expiry date and serves as an insurance policy under the business transaction. Demands for payment from the issuing bank are usually only made when the applicant breaches its underlying contract/agreement.
When the beneficiary demands payment, the Bank Guarantee (BG) becomes a payment instrument. The beneficiary needs to present the required documents to the bank (guarantor) as agreed upon in the Bank Guarantee to receive payment.
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Demand/Document Bank Guarantees
Demand or document Bank Guarantees (BG) are payable by the bank when complying demand/documents are submitted by or on behalf of the beneficiary.
When the presented documents are received, the guarantor will review the documents against the terms and conditions of its guarantee to decide if a payment is warranted.
Unlike Documentary Letters Of Credit, lawyers are usually involved in drafting the Bank Guarantee text for their clients, because Bank Guarantees are very flexible and can be used for many types of business transactions.
Types Of Bank Guarantees
Bid Bond Guarantee
Performance Bond Guarantee
Advance Payment Guarantee
Warranty Bond Guarantee
Letter of Indemnity
Confirmed Payment Order Guarantee
Bank Guarantee Closing Process
Step 1: Application
Fill out and return the Bank Guarantee (BG) Application
Step 2: Issuing of Draft
A 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 SWIFT, including the reference number of the BG.
Your seller’s bank should be able to receive and confirm the Bank Guarantee (BG) transmission soon thereafter.
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