Bank guarantee BG (Bank guarantee) or LG (Letter of Guarantee) is issued to banks or other credit - financial institutions, at the request of the borrower (principal) that is a written obligation to pay to the principal creditor (beneficiary) in accordance with the terms of the obligation given by guarantor the amount of money upon submission of a written request of its payment by the beneficiary. For issuing guarantee the principal shall pay compensation to guarantor. A bank guarantee cannot be revoked by the guarantor, and transferred to another person if it does not provide otherwise.
As a general rule, a bank guarantee is irrevocable, because it can not be revoked by the issuing guarantees. The rights of the beneficiary of the bank guarantee are REPRODUCIBLE as belonging to the beneficiary claim to the guarantor may not be transferred to another person.
For our clients we issue guarantees - an independent commitment to the benefits to the recipient to pay a certain amount against a written request to the beneficiary a statement of the failure counter partner of benefits of recipient of its obligations under the contract.
As in the case of a letter of credit, bank guarantee is an independent from the contract bank's obligation to pay against providing the documents, but the essence of the guarantee is to ensure the fulfillment of obligations, that is, the payment guarantee has a role in the case of non-fulfillment of contractual obligations.
As a guarantee is a tool which is independent from the contract, so the bank received a call on the guarantee, shall make a payment regardless of the actual status of the applicant's performance of its obligations.
Guarantees (in the case of imports of goods, works or services) are available to provide more favorable conditions of supply.
Having the bank guarantee, the beneficiary (seller) may provide to the principal (the buyer) trade credit (delay), increase the amount or the period of delay, to give an additional discount on the purchased products, etc.
Beneficiary (seller) knows that the risk of non-payment of the principal (the buyer) for the goods (works, services) is already covered by a bank guarantee.
For the buyer guarantee is profitable with low-cost and availability of additional commercial benefits from the seller.
The guarantee is very flexible and convenient tool of financing, if the seller agrees to use the guarantee and deferred payment is provided to the buyer, the buyer can independently plan purchases and payments to the seller, provided that the amount of debt of the buyer to the seller shall not exceed the amount of the bank guarantee.
To receive payment under the guarantee the seller must provide to the issuing bank guarantees a written application in the free form that the buyer did not fulfill its contractual obligations.
Sometimes to the statement is attached a copy of unpaid bills and / or transport documents confirming shipment of goods to the buyer. The authenticity of the seller’s statement shall be confirmed by the bank, in which he served.
Bank guarantee subjects to the laws of the country in which it was released. Therefore, foreign suppliers ask to provide a guarantee, which would be governed by the laws of the country where they are located. It is not always convenient for the buyer, because it is necessary for issuing guarantees to involve a third bank, which is in the seller's country. In this case it is better to release stand-by letter of credit (similar to a bank guarantee), which is subjected to the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce.
Bank guarantees are very versatile and flexible documentary tools which allow to reduce not only the risk of payments, but also many other factors such as the risk of default of contract, breach of warranty and tender obligations.
Basic forms and varieties of guarantees:
1.Guarantee of payment obligations is a guarantee of the obligations of the buyer to pay the agreed amount of the contract.
2.Guarantee of the refund is a guarantee of the obligations of the seller to perform the advance payment made by the purchaser under the terms of his contract.
3.Guarantee of the implementation of the contract is a guarantee to open for the proper performance of the contract (supply of goods specified in the quality and completeness in the time and so on). It is usually exposed by 5% - 20% from the contract amount.
4.Tender guarantee is a guarantee of performance by the bidder of its tender obligations. Typically, tender obligations are in signing a standard form and in providing a performance guarantee of the contract (it is usually exposed by 1% - 5% of the contract amount).
5.Guarantee of repayment of the credit is a bank guarantee in favor of the creditor to ensure obligations of return of the loan by the borrower given to him by the lender.
6.Guarantee exportation is a guarantee of the obligations of the party carrying out duty-free importation of equipment into the country with the obligation to export in certain time (for example, for display at the exhibition, and so on).
7.Guarantee of investment obligations is a guarantee in securing of the obligations of the investor to fulfill its investment obligations. It is usually required, as one of the conditions of participation in the tender for the purchase of shares.
As a rule, the guarantees are issued for a period of one (1) year and one (1) month.
Issue of the bank guarantee, as well as all confirmations and notifications of bank guarantees are only for SWIFT MT760.
The attractiveness of the bank guarantee
1.Ensure the interests of counterparties in various fields.
2.Do not distract from the circulation of money resources.
3.Provide an opportunity to receive from counterparties a trade credit secured by a bank guarantee acts.
4.Being "conditional payment obligation", the guarantee is cheaper product than a credit or factoring.