Among banking products, there is one that many customers have not heard of – even those to whom it could be useful. At the same time, it is a very reliable tool with which you can open new horizons for business, strengthen relations with contractors, and move to a new level.
We are talking about a bank guarantee – that is, providing a credit institution with a client’s obligations. Today we will tell you in detail about the parties to the transaction under a bank guarantee, the process of concluding an agreement, options for interaction between business partners and much more.
The essence of the bank guarantee agreement
A bank guarantee is a very interesting and somewhat unique type of financial services, which is worth talking about in detail. but despite the common features, a bank guarantee is significantly different from these services.
In essence, a bank guarantee is a documentary obligation provided by a bank and to pay a certain amount of funds for a client in case of violation of the terms of a transaction with a third party. Thus, to conclude such an agreement, the following conditions are necessary:
- The conclusion of a paper transaction between two parties;
- The presence of a well-defined monetary expression in this transaction (for example, the amount of the advance payment, the value of the goods, the prescribed amount of the penalty);
- The desire of the party – the customer, which under the transaction is to receive goods or services, to protect themselves from violation of the terms of the contract;
- The appeal of the party – the contractor, which under this transaction is obliged to provide goods, services, etc., to the bank to receive guarantees for the fulfilment of the conditions.
The essence of any contract is the provision of services or goods for a fee. The bank guarantee, therefore, protects the interests of the customer – in case the goods are not provided, a time violation occurs, the quality is unsatisfactory, the bank will pay him a predetermined amount, which will be enough to cover the damage.
- Guarantor – a bank issuing a guarantee to the applicant. It is worth noting that such a service is not provided by all credit institutions, but only the largest and most reliable. Their current list can always be found on the website of the Ministry of Finance, and the data is updated monthly.
- The principal is the contractor, who applies to the bank with a request to provide a guarantee of fulfilment of obligations. He fully pays the bank the cost of the guarantee provided to him after checking the documents and financial situation.
- Beneficiary – a customer under an agreement who is to receive goods and services. It is his interests that the guarantee protects – because in case of violation by the contractor, the bank will pay a significant amount to the beneficiary.
As we can see, the guarantee from the bank is really significantly different from other services:
- Although the guarantee is issued as a loan and for a fee, the bank essentially does not provide the client with anything tangible. So, unlike a loan, he does not receive anything and should not repay.
- Although there is a resemblance to insurance – a guarantee is also a way to reduce risk – the beneficiary is a third party who is not involved in the transaction process. In addition, unlike insurance, the bank pays the guarantee funds on a reimbursable basis – that is, the principal must cover costs in one way or another.
Although the existence of a bank guarantee is stipulated by several legislative acts at once, in essence, no specific requirements are presented to its form and content. As a result, each bank has its own form of guarantee agreement, which may differ significantly from each other. However, they all include the following fundamental points:
- Legal names and other characteristics of all three parties: guarantor, principal, beneficiary;
- Guarantee period;
- The cost of the guarantee – that is, how much the principal will pay the bank at the conclusion of the contract. As a rule, the cost is 2-4% of the amount of obligations, in some cases, it can reach up to 10%;
- Compensation amount – that is, the funds that the bank will pay to the beneficiary. This can be either the amount under the contract or any other – it all depends on the terms of the transaction.
The subject of guarantee: what obligations are provided by the contract. There are quite a few types of guarantees; they are classified according to the types of contracts and the nature of the obligations that they provide. The cost of the guarantee also directly depends on this factor – under some agreements it is much lower than under others since the risk for the bank is minimal.
What is a bank guarantee for?
Traditionally, banks and financial groups are considered one of the most reliable and reputable institutions. Obtaining a bank guarantee allows the principal to look more reliable in the eyes of the customer than competitors. Of course, in most cases such an executor will be preferred – after all, the interests of the beneficiary will be protected at any outcome of the transaction, so that the risks are minimized. In this case, all financial costs for the purchase of a guarantee are borne by the contractor.
In addition, the fact that the bank is ready to provide some company with its guarantees already speaks in its favour. The fact is that considering a guarantee for the complexity and depth of the approach is no different from approving a loan application for business – which means that the bank will comprehensively study the following aspects:
- Legal “transparency” of the business – everything should be formalized correctly and officially.
- Solvency and financial condition are the main factors. The bank must be sure of the reliability and stability of its partner.
- Timeliness of fulfilment of other obligations (for example, on taxes), absence of litigation and disputes with counterparties. This characterizes the principal as a company that is able to fully and timely meet its obligations – which means that the bank with a high degree of probability will not have the need to pay significant amounts under a bank guarantee.
- A good business reputation speaks about the conscientious attitude of the client to his obligations.
- The essence of the contract also plays a large role – if it comes to something innumerable or difficult to analyze, then the bank may refuse to issue a guarantee. The fact is that the fact of fulfilment by a principal of obligations, in this case, will entirely depend on the opinion of the beneficiary. Simply put, the latter, based on personal views and subjective opinions, may consider the contract unfulfilled and demand compensation under warranty. Such contracts are disadvantageous to the bank.
Thus, from the point of view of the beneficiary, the benefits of a bank guarantee are obvious: without extra costs, he acquires a reliable counterparty in the person of a bank guarantee, and TD Bank Routing number he is sure that all the documents and financial records of the counterparty comply with the requirements.
The principal’s benefit is as follows :
- Firstly, he has the opportunity to significantly expand the circle of his counteragents, to start cooperating with large companies, to obtain the status of a reliable and sustainable partner;
- Secondly, there is an opportunity to participate in tenders and receive contracts from government agencies. The fact is that, according to the law, to participate in tenders you must either provide a cash deposit or a bank guarantee. And in most cases, buying the latter turns out to be more real and more profitable than withdrawing part of the funds from circulation and losing potential profits or taking a bank loan at high-interest rates.
- Thirdly, even if the conditions of the contract are violated, the principal has time to return the funds – because he owes it to the bank, not the counterparty, and the conditions for reimbursement, their terms are strictly stipulated in the guarantee agreement. In this case, it may be possible to transfer collateral to the bank, in which case there is no need to reimburse the bank for expenses in cash.
Obviously, the principal, as well as the beneficiary, has quite weighty arguments in favour of bank guarantees. As for the bank, it also has its advantages:
- First, of course, this is the cost of the guarantee. Although it is much lower than interest on loans, it is paid in full at one time. In addition, in return, the bank does not provide the client with financial resources – that is, in fact, absolutely nothing is lost. All bank costs are the costs of considering the application;
- Secondly, in most cases, compensation under the guarantee is not required, because it is in the interests of the principal to fulfil his obligations on time. Otherwise, he loses profit, a prospective client, the trust of the bank, and in the future is obliged to reimburse the guarantor expenses;
- Secondly, even in the case when the client violated the terms of the contract and the bank had to pay compensation, the credit institution has insurance against losses – for example, a pledge of property. Thus, even if the client does not reimburse the guarantor for expenses, they will claim and sell the property from him.
Thus, a bank guarantee is useful for all three parties to the contract, and its cost is quite acceptable for the principal (2-10% of the amount of compensation). Now let’s talk about the existing types of guarantees.
Types of Bank Guarantees
Depending on what kind of customer obligations a bank guarantee provides, there are a number of varieties of this banking product:
- The guarantee of the execution of the state contract is provided by law, and more precisely – Federal Law 223. Without it, a potential contractor (contractor) will not even be allowed to consider an application for a contract from the state. The essence of such a guarantee: in case of default by the principal, the bank reimburses the agreed amount;
- A tender guarantee is also required. It is received by ve companies wishing to bid on tender sites. This guarantee extends solely to the obligation of the winner of the tender to conclude a contract with the customer; it does not extend to further cooperation.
- Customs guarantee – a contract between the bank and the principal, ensuring the customer’s obligations to the customs authorities. Most often we are talking about the need to pay customs duties (especially by instalments), but there are a number of other situations in which cash security or a bank guarantee is required – for example, when equipment for work is temporarily taken to the territory of the country, and it must be transported to exact term;
- A judicial guarantee is used in cases where the consideration of a claim requires the seizure of the company’s property or suspension of its activities (which in many cases is the same). Having received a guarantee from the bank for the judiciary, the defendant can continue its activities – the financial institution guarantees its full compliance with all requirements;
- A refund guarantee is used when the customer pays the advance payment to the contractor. In this case, the beneficiary wants to receive confirmation of the return of this payment if the principal fails to fulfil obligations. By providing a bank guarantee, the contractor thereby proves that the customer will receive his money in any case – and the principal will already pay these funds to the bank;
- Payment guarantee is the opposite. The Bank provides the customer with an obligation to pay for delivered goods or services. It is used less often, but it is still used, especially when working with an “open account”.
There are many varieties of guarantees if you structure them by type of obligation. In addition, it is worth noting that guarantees can be secured (with collateral) and unsecured, issued by one bank or several (syndicated), etc.
How to get a bank guarantee
If you plan to participate in tenders, want to get a state contract or the counterparty requires securing obligations under the transaction, then you need to get a bank guarantee. This is an excellent substitute for withdrawing money from circulation and “canning” them in accounts.
To get a guarantee, you need:
- Choose a bank. Guarantees are issued only by the largest banks (Citibank, td, wells Fargo, etc.), so the choice is small. Nevertheless, you can get a guarantee even in a small city;
- Collect documents according to the list provided by the bank. It may differ depending on the type of guarantee, but in any case, you will need the legal and financial documents of the company, a contract signed with the customer or tender data, title documents for the pledge (for secured guarantees);
- As a rule, opening an account with a bank is required (at this stage or during the payment of the guarantee);
- Submission of the application and its consideration. The process may take up to 7-10 days. The Bank conducts a full assessment of the business, performs a legal audit, the company and its founders are checked by the security service;
- In case of a positive decision, the registration of the pledge takes place, its insurance (if necessary) and payment of the guarantee;
- At the last stage, the bank issues a specially prepared document – a bank guarantee, which can be presented to the customer as a confirmation of their reliability.
The total duration of the process of issuing a guarantee can take from 2-3 days to several weeks, depending on the number of obligations, the complexity of the client verification, the remoteness of the bank from the parent bank (approval of such transactions takes place at the top level, therefore documents can be repeatedly checked, returned for revision). Therefore, it is worth preparing in advance for a guarantee and not leaving it at the last moment.
According to the principle of issuing a bank guarantee very much like loans for business, however, it is an independent financial product. A guarantee may be required in cases where the customer does not conclude a contract with the contractor, requiring additional security of obligations.
In fact, with the help of the guarantee, the bank is “entrusted” with the principal, and if the latter violates the agreement, it is obliged to pay compensation to the beneficiary. But at the same time, the guarantor also ensures its interests, requiring the contractor to return the money spent in full.