What is Bank guarantee
Bank guarantee – this is one of the types of insurance risks in the enforcement of transactions. The essence of such insurance is that all risks in a transaction between economic entities are acquired by a Bank, insurance company or other legal entity (guarantor) at the request of the transaction participant (principal). The guarantee is issued in writing. In case of default by the principal of its obligations to the creditor, the grant undertakes to cover the losses of the latter either in full or to the extent specified in the guarantee.
Currently, in the Russian business, this type of insurance transactions is not as common as in the economies of Europe and the United States, however, the trend for its spread in the last few years is positive.
In economic terms, the guarantee is not much different from the guarantee. That is, as with surety, the Bank guarantee insures the risks of the lender, which he acquires in a transaction with the borrower, but between these two concepts there are some differences.
Unlike a surety, which is part of a transaction, a Bank guarantee is not part of the transaction it secures. In other words, it is a unilateral transaction between the guarantor and the principal, even if the guarantee contract refers to a transaction between the principal and the creditor. The guarantor’s obligations cannot change depending on the development of the transaction they provide. Even if the transaction between the principal and the creditor is declared invalid, the Bank guarantee remains in effect.
The Bank guarantee is issued for a certain period and cannot be withdrawn by the guarantor. This is the principle of urgency and irrevocability of the Bank guarantee. Without the approval of the lender or principal, the guarantor cannot withdraw the guarantee. Mirsovetov notes that cases of withdrawal of guarantees are rather rare because strongly undermines reputation of the guarantor.
Advantages of Bank guarantees
The Bank guarantee gives a number of significant advantages to both the principal and the creditor.
The main advantage of the Bank guarantee for the borrower is that if it is available, the principal can participate in tenders for the supply of goods and services to the state and municipal authorities. The presence of a Bank guarantee can help to get a commodity credit from suppliers. Suppliers with a Bank guarantee may grant a deferred payment for the duration of the guarantee, and, as a rule, the fee for the provision of a Bank guarantee is lower than the fee for borrowed funds that could pay the debt.
Banks have recently become more liberal approach to the issue of Bank guarantee, without requiring additional security, however, it is worth noting that such a guarantee will cost more.
For the lender, the Bank guarantee also has a number of advantages. First, transactions secured by a Bank guarantee are less risky, because if the terms of the contract are not met, the lender will be able to claim damages from the guarantor. The guarantee is sufficient security for advance payments. The presence of a guarantee, as a rule, indicates a stable financial position of the principal, which reduces the risks of concluding a contract with him.
The parties relations with the Bank guarantee
Three parties are involved in the process of the Bank guarantee: the guarantor, the principal (borrower) and the beneficiary (lender).
Any financial and credit institution or insurance company can act as a guarantor in the course of the Bank guarantee. However, according to the latest requirements of the legislation, insurance companies can not act as guarantors for receiving state orders.
Guarantees issued by other individuals or legal entities, including state authorities, have no legal force.
The principal, in the course of the Bank guarantee, is the person – the borrower under the contract, which is provided by the Bank guarantee. It can be a supplier of goods or services, a buyer, a Bank borrower, a tenant, etc.
A beneficiary is a person who acts as a lender in a relationship that is secured by a Bank guarantee.
Types of Bank guarantees
Bank guarantees are of several types. The most common is a Bank guarantee offer or, as it is called, the tender guarantee. This guarantee covers the risks of the buyer in the event that the principal fails to deliver on the contract or renounces obligations after the tender.
Payment guarantee is a tool to cover the risk of the seller from non-payment of the buyer. This guarantee is often used for a commodity loan or deferred payment for an already delivered product or service.
The guarantee for customs payments is issued by banks to importers of goods to ensure payment of customs duties, sanctions for violation of customs rules.
The performance guarantee is issued to the supplier or contractor to compensate for the customer’s losses if the first parties fail to comply with the terms of the contract.
The guarantee of repayment means that the guarantor undertakes to reimburse the amount of advance payment if the principal does not fulfill its obligations.
The loan repayment guarantee is applied for credit operations.
Stages of formation of Bank guarantee
The Bank guarantee goes through several stages of its formation. In the first stage, a principal in written form and forwards to the guarantor a request to issue a guarantee. The guarantor then decides whether to grant the request. On the third Tapa between the principal and the guarantor is an agreement on the provision of a Bank guarantee, after which the first pays the latter fee. After payment of the fee, the guarantor issues a Bank guarantee to the principal, which indicates: the duration of the guarantee, the amount for which the guarantee is issued, the list of documents that the beneficiary must provide with the requirement.