Type of bank guarantee. Securing a bank guarantee

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

One of the ways to secure financial obligations, when a credit institution, at the request of the principal, must make payment to the beneficiary, are bank guarantees. These conditions are written in the contract. A bank guarantee can be considered a payment document only if it is drawn up in strict accordance with applicable law.

Essence

Bank guarantee agreement is one of the most popular financial instruments. The lending organization, by signing the document, simply confirms the solvency of the contractor. But at the same time, it guarantees the fulfillment of obligations. Such an additional protection tool gives confidence in the completion of work within the specified time frame.

Companies often work with government agencies. In this case, long-term cooperation agreements are usually concluded. When a certain sector of the economy is activated, a competition for work is announced. One of the requirements for the winner isprovide a full package of documents for issuing bank guarantees. This confirms the seriousness of intentions.

Why is this needed?

The issuance of bank guarantees is most often carried out when concluding contracts for large amounts. In this case, this tool acts as a kind of insurance for all sides of the transaction. The credit institution monitors compliance with the terms of the transaction. And even if the partner goes bankrupt, the beneficiary will still receive a reward. All types of bank guarantees and guarantees are used to prevent the occurrence of financial risks.

Relationship members

• The guarantor bank (sometimes an insurance company) is an organization that assumes the obligation to make a payment to the beneficiary under certain circumstances.
• Principal - debtor, borrower, person who pays interest.
• The beneficiary is the beneficiary.

Type of bank guarantee

• Unconditional. The bank is obliged to transfer funds at the written request of the beneficiary. In this case, the application must be drawn up in a strict form.
• The beneficiary's statement must be supported by documents that confirm the principal's failure to fulfill his obligations.
• Secured is a type of bank guarantee that is issued against collateral.
• Fulfillment of obligations by the principal can be additionally confirmed by another bank, which is jointly and severally liablein front of the beneficiary. Several credit institutions may participate in the transaction. This type of bank guarantee is called syndicated. It is most often used in international transactions. The more banks involved, the more expensive the service will be.
• If the obligation is accepted by one credit institution, then this type of transaction is called direct. If the bank, on behalf of the principal, requires confirmation of the fulfillment of the terms of the transaction from another financial institution, then this is a counter-guarantee. Such contracts are also more commonly used in international transactions.

Working principle

The lender provides funds to the principal. An agreement is concluded as confirmation of the fulfillment of obligations. If the borrower has not returned the funds, then the requirements are presented to the principal's bank. Copies of documents from the beneficiary are sent there. The specified amount is transferred to the account of the beneficiary. The credit institution may present claims of a recourse nature to the principal. The document comes into force from the moment of signing and is valid until the deadline stipulated by the time frame for deliveries.

Design steps

1. Submission of a pre-guarantee letter by the borrower with the consent of the guarantor bank to ensure the repayment of the loan.

2. Obtaining permission from the beneficiary's financial institution.

3. Drafting and signing documents.

Nuances

The bank guarantee agreement is concluded between three participants: the principal, the beneficiary and the bank. ATthe document fixes the amount of remuneration. In the event of a breach of the obligation, the bank will present a recourse demand to the principal. The amount of remuneration is also pre-written in the document. The presence of this clause in the contract is beneficial primarily to the principal. The bank will not be able to make too high demands or inflate the amount of pen alties. A notarized copy of the credit institution's license must be attached to the agreement.

Such contracts are highly reliable and fast-selling instruments that bring additional income to a financial institution and do not require the withdrawal of funds from circulation. Russian financial institutions draw up such documents on the condition that the client has the security of a bank guarantee (securities, goods and materials, etc.), and work with old partners on the terms of a direct write-off of the amount of debt from the account.

The contract is only in writing and must be sealed and signed by the parties. Also, the document should state that:

• beneficiary will receive the full amount specified in the contract;
• document expires;
• if the beneficiary refuses to receive a reward, he must return the guarantee to the organization that provided it.

Other details:

• Name of the parties (guarantor and principal).
• Name of documents on the delivery of goods.
• Max payout.
• Terms of guarantees.
• Terms of termination of the contract.
• Rulesmaking payments.

Conclusion

To confirm the seriousness of intentions and minimize financial risks, especially when concluding international transactions, participants can issue a bank guarantee. The credit institution undertakes to transfer money to the beneficiary's account upon the occurrence of certain conditions. Regardless of what type of bank guarantee is used, the financial institution simply confirms the solvency of the client. Paperwork will cost 1-5% of the transaction amount. Credit costs more. Yes, and counterparties are more likely to cooperate if the client agrees to sign a bank guarantee.