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What is a bank guarantee

A bank guarantee is one of the types of risk insurance in bringing deals. The essence of such insurance is that a bank, an insurance company or another legal entity (guarantor) acquires all the risks of a transaction between economic entities at the request of a participant in a transaction (principal). Warranty issued in writing. In the event that the principal fails to fulfill his obligations to the creditor, the grant undertakes to cover the losses of the latter either in full or in the amount specified in the guarantee.

At present, this type of insurance of transactions is not as widespread in the Russian business as in the economies of Europe and the USA, however, the trend towards its spread over the past few years has been positive.

In economic terms, the guarantee does not differ much from the guarantee. That is, as with the guarantee, the bank guarantee insures the risks of the lender, which it acquires in a transaction with the borrower, but there are some differences between these two concepts.

Unlike the guarantee, which is part of the transaction, the bank guarantee is not part of the transaction it provides. In other words, it is a one-sided transaction between the guarantor and the principal, even if the contract of guarantee contains a reference to the transaction between the principal and the creditor. The obligations of the guarantor may not change depending on the development of the transaction they provide. Even with the recognition of the transaction between the principal and the lender is not valid, the bank guarantee continues to be valid.

The bank guarantee is issued for a specific period and cannot be revoked by the guarantor. This is the principle of urgency and irrevocability of the bank guarantee. Without the approval of the creditor or principal, the guarantor cannot withdraw the guarantee. MirSovetov notes that the cases of withdrawal of guarantees are quite rare, because it greatly undermines the reputation of the guarantor.

Advantages of bank guarantees

The bank guarantee gives a number of essential advantages, both to the principal, and the creditor.

The main advantage of a bank guarantee for a borrower is that, if available, the principal can participate in tenders for the supply of goods and services to the state, as well as to municipal authorities. Having a bank guarantee can help you get a commodity credit from suppliers. Providers with a bank guarantee can provide a deferment of payment for the duration of the guarantee, and, as a rule, the fee for a bank guarantee is lower than the payment for borrowed funds that could be used to pay the debt.

Banks have recently begun to take a more liberal approach to the issue of a bank guarantee, without requiring additional collateral, however, it is worth noting that such a guarantee would cost more.

For a lender, a bank guarantee also has several advantages. Firstly, transactions secured by a bank guarantee are less risky, because if the conditions of the contract are not fulfilled, the creditor will be able to claim damages from the guarantor. The guarantee is sufficient collateral for advance payments. The presence of a guarantee, as a rule, indicates a stable financial position of the principal, which reduces the risks of concluding a contract with him.

Parties to a relationship with a bank guarantee

In the process of a bank guarantee, three parties are involved: the guarantor, the principal (borrower) and the beneficiary (creditor).

The guarantor in the course of the bank guarantee can be any financial institution or insurance company. However, according to the latest requirements of the legislation, insurance companies cannot act as guarantors for receiving a state order.

Warranties issued by other individuals or legal entities, including state authorities, are null and void.

The principal, in the course of a bank guarantee, is the person – the borrower under the contract, which is provided with a bank guarantee. This may be a supplier of goods or services, a buyer, a bank borrower, a tenant, etc.

A beneficiary is a person who acts as a lender in a relationship that is secured by a bank guarantee.

Types of bank guarantees
Bank guarantees come in several forms. The most common is the bank guarantee of the offer or, as it is also called, the tender guarantee. This guarantee covers the risk of the purchaser in the event that the principal disrupts the delivery dates under the contract or refuses obligations after the tender has been held.

The payment guarantee is a tool to cover the seller’s risk of non-payment by the buyer. Such a guarantee is often used in case of a commodity credit or deferment of payment for a product or service already delivered.

A guarantee on customs payments is issued by banks to importers of goods to ensure the payment of customs payments, sanctions for violation of customs regulations.

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