Bank guarantees are Which banks and under what conditions issue a bank guarantee

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

A bank guarantee is a rather specific service of banks, which is represented by a financial offer. It is similar in different principles to lending or insurance, but it has many unique features. This service is presented with a certain guarantee of a banking institution that if the client violates the terms of any agreement, then the funds will be paid for him by the bank.

The essence of the guarantee

This bank service is provided only to enterprises and individuals with high solvency and who are regular customers of a particular institution.

The service assumes that the bank becomes the third party to any transaction. A bank guarantee is a bank's promise that its client will cope with its obligations under the contract, and if for some reason there are difficulties with this process, the bank will pay off the debt on its own.

Terms of Service

To enter into such an agreement, certain conditions must be met:

• a written agreement must be concluded between the two parties to the transaction;
• this transaction must have a monetary expression, represented by an advance, the cost of a specific product or service, and a pen alty may also be prescribed, since the bank guarantees that it will transfer these funds on its own if the client cannot cope with the terms of the agreement;
• the customer, who is the recipient of the service or product, wants the terms of the contract to be secure, therefore, requires the participation of the bank in the form of a guarantor;
• the contractor must apply directly to the bank, where he is a regular customer, with a request to issue a bank guarantee.

The essence of this service is that the bank provides confidence to one participant in the transaction that all the terms of the agreement will be fulfilled by the other party. This ensures the protection of the interests of the buyer or customer. If the service is not provided for any reason, and the terms or other conditions are violated, then it is the bank that compensates the costs of the second party, providing coverage for the damage.

Parties to the agreement

There are multiple participants in this banking service. Obtaining a bank guarantee involves the participation of the parties:

• Guaranteed It is represented by the banking institution itself. This service is offered by a small number of large and reliable banks. Before participating in the contract, the organization carefully checks its client,because she must be sure that there will be no situation when it is necessary to return losses to the second party. Banks issuing bank guarantees are represented in a small number. You can find out exactly where you can apply for this service on the website of the Ministry of Finance. The data available on the resource is updated monthly.
• Principal. Presented by the contractor by agreement. It is he who applies to the bank for a guarantee. He must transfer to the bank a certain amount of funds, represented by a fee for the service received. The guarantee is provided only after all documents of the contractor are carefully checked. Bank employees must make sure that the contractor represented by the firm or individual is a solvent and reliable client.
• Beneficiary. Presented by the customer by agreement. It is he who must receive services or goods, and at the same time wants to make sure that the obligations under the contract will be fulfilled in full and on time. Therefore, it requires the provision of a bank guarantee. At the expense of her, his interests are protected. If, for various reasons, the contractor fails to fulfill the terms of the contract in a timely manner, he will receive a large amount of funds from the bank.

When concluding a guarantee agreement, the beneficiary is only required to have additional collateral provided by various securities for the planned transaction. He does not need to contact a banking institution, and he does not deposit his funds when paying for the guarantee. But if he himself violates the terms of the contract, for example, does not make an advance payment on time,then he may not get a guarantee from the bank.

Agreement Requirements

In several legislative acts there is information on the possibility of applying bank guarantees. But at the same time, there are no specific requirements that the parties to such an agreement must comply with. Therefore, each banking institution has the ability to develop its own form of this document, so these contracts may vary significantly in different banks.

But certain requirements for a bank guarantee must be observed. Therefore, the nuances will certainly be included in the contract:

• enter the names of the three parties involved in this transaction;
• characteristics of the bank, principal and beneficiary are given;
• specifies how long the guarantee provided for a specific fee is valid;
• information about the cost of a bank guarantee is entered, namely, it indicates how much money will be transferred by the client to the bank, and the amount is usually set within 3% of the amount of obligations, but in difficult situations, the fee can increase up to 10%;
• calculates the amount of compensation represented by the funds that will be paid to the beneficiary by the bank if the principal for various reasons cannot meet his obligations;
• gives the direct subject of the guarantee, represented by specific obligations secured by the contract.

Depends on the correctness of the documentregulation cooperation.

Nuances of the offer

There are quite a few different types of guarantees. Bank guarantees are confirmation by the bank that the principal will fulfill the terms of the contract, therefore they differ in the type of contract drawn up or the nature of the existing obligations. This information determines what information is included in the agreement.

Such a banking product is considered complex and useful. This is especially true for enterprises that wish to conclude a specific transaction, but the counterparty has serious doubts about the profitability of this process. The unique effect of a bank guarantee enables each participant in the transaction to feel confident in making a profit from cooperation.

Purpose of the guarantee

It is banks that are considered the most reliable and stable institutions, so if they give their guarantee, this gives confidence to each participant in any transaction that all the terms of the contract will be observed by the second party. Upon receipt of a bank guarantee, the principals can count on the conclusion of lucrative contracts. They look more reliable in the eyes of contractors than competitors.

Due to the bank guarantee, the risks of the participants in the transaction are minimized. At the same time, the bank studies various parameters of the principal, so you can be sure of his integrity and reliability.

Who can become a principal?

Bank guarantee conditionsare strict, therefore, numerous requirements are imposed on the client. Various nuances of the transaction and the company itself are being studied. Bank employees must first make sure of the following points:

• business is legally clean;
• financial condition is stable;
• firm is solvent;
• company is stable and reliable;
• all other obligations during the entire period of operation of the enterprise were fulfilled in a timely manner and in full;
• have an ideal business reputation as a conscientious and reliable partner;
• The amount of the contract must correspond to the result of cooperation.

Due to such careful verification, it is guaranteed that the principal is indeed considered a reliable enterprise for cooperation.

Pros of attracting a bank

For the principal, the use of a bank guarantee has many parameters. These include:

• the number of counterparties who are ready to cooperate on optimal conditions is increasing;
• receives the firm's status as a stable and conscientious partner;
• given the opportunity to enter into large contracts or participate in the auction;
• even if for various reasons the terms of the contract are violated, the principal has time to return the funds to the banking institution on the previously agreed terms.

Therefore, this service is becoming more and more popular among many companies.

Benefits for banks

Providingbank guarantee has some advantages for the banks themselves. They do not need to spend a lot of money to participate in the transaction, and at the same time they require a high payment from the principal. Due to due diligence, it is rarely necessary to repay the obligations for the client.

Even if the terms of the agreement are violated, the bank will still return its funds, and often it even requires collateral from the principal, which can be sold at auction to return the money.

Types of guarantees

Bank guarantees are numerous transactions that can be made in relation to various contracts. The most popular types of guarantees are:

• Execution of the state contract. Accounting for bank guarantees of this type is carried out on the basis of the provisions of Federal Law No. 223. Without it, a potential contractor submitted by the contractor will not be allowed to consider the application. Therefore, in order to work under government contracts, in any case, you will have to contact the bank.
• Tender. It is a mandatory guarantee, which is issued by firms planning to participate in tenders on trading floors. It only applies to the obligation to conclude a contract with the customer. Not valid during collaboration.
• Customs. It is used if it is required to ensure obligations to the customs authorities. This usually refers to the payment of various customs duties, if an installment plan is provided for this.
• Judicial. This guarantee applies tosituations when, when considering a claim, it becomes necessary to seize the property of the company. Therefore, it is needed for the judiciary.

There are many more types of other guarantees that depend on existing obligations. They may be secured or unsecured. Even syndicated ones issued by several banking organizations stand out.

Design steps

To receive this bank service, you need to complete several consecutive steps. A bank guarantee for the performance of a contract is issued when performing the following actions:

• Initially, there should be a need to obtain a guarantee, for example, it is required to participate in public procurement or sign a contract with an organization;
• next, a search is made for a bank that will act as a guarantor, for which it is necessary to study all possible options on the website of the Ministry of Finance;
• an application for a guarantee is being prepared, after which it is submitted to the bank where it is planned to be issued;
• in the application, all parties to the transaction are registered, as well as the conditions for using the guarantee;
• in addition, all documents on the planned transaction are transferred to the bank;
• a direct guarantee agreement is drawn up, and all issues regarding cooperation are preliminarily discussed;
• funds are transferred to the bank for services.

Further, if necessary, the bank pays money at the request of the beneficiary, if there are good reasons. Especiallywhen drawing up a contract, much attention is paid to the term of the bank guarantee, which is usually equal to the duration of the transaction itself or may end at the moment when the goods are directly delivered.

Conclusion

Thus, bank guarantees are considered to be demanded offers of banks. They are issued only in large and reliable institutions. They act as a guarantee that a particular party to the transaction will cope with its obligations. If this does not happen for various reasons, then it is the bank that will pay compensation to the second party.