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What is a Bank Guarantee?

IntaCapital Swiss offer clients simple solutions to complicated financial requirements.

Bank Guarantees – An Explanation

More and more lenders are looking towards Bank Guarantees to underwrite their transactions. Whether it is an indirect or direct guarantee, a Bank Guarantee is the perfect instrument to act as security in case a borrower defaults on a loan. There are many different types of guarantee, some of which are explained below, but the transfer mechanism remains the same. The Issuing Bank, on instructions from their client (The Applicant or Provider), transfers a Bank Guarantee through the SWIFT system to another bank, (The Receiving Bank) for the account of their client, (The Beneficiary).

There are myriad of banking instruments in the financial system, and for the purposes of this overview, it is important to explain the difference in reimbursement procedures between a Bank Guarantee (BG), a Standby Letter of Credit (SBLC), and a Documentary Letter of Credit (DLC). The simple answer is a Bank Guarantee is a SECURITY for a payment and a Standby and Documentary Letter of Credit are a MEANS of payment.

Whichever country is home to an Issuing Bank, it is that country that governs all legalities regarding the issuance of Bank Guarantees. It is therefore necessary that each Bank Guarantee is examined individually, as the legal position of a Bank Guarantee can differ from country to country.

All guarantees whether they are a Bank Guarantee or a Performance Guarantee are either direct or indirect guarantees. A Direct Bank Guarantee is as the name implies a guarantee that is transferred direct from one bank to another. An Indirect Bank Guarantee however, is where the Issuing Bank instructs their correspondent bank to issue a Bank Guarantee on their behalf. As the Performance Bond has been alluded to above, it is pertinent at this stage to recognise the differences between a Bank Guarantee and a Performance Guarantee or Surety Bond. A Bank Guarantee is payable on DEMAND and a Performance Guarantee or Surety Bond, have to conform to certain criteria before being eligible for payment.

Demand Bank Guarantees form an integral part of the global financial system, and without them obtaining capital injections, loans and lines of credit, alluded to as Credit Facility Guarantees, would be a lot more onerous. To ultimately obtain a credit line, a unique financial model has been written. “The Collateral Transfer Facility”. This facility employs the use of Demand Guarantees which are governed by ICC Uniform Rules for Demand Guarantees (URDG 760), utilises a unique format and are payable on FIRST DEMAND.