Bank guarantee terms and conditions

 

Conditions of the bank guarantee provision and its essence

Bank guarantee terms and conditions

Today successful business in many areas is almost impossible without financing instruments, one of which is a bank guarantee. This tool is governed by civil law and provides a high degree of reliability of various transactions.

Definition

Bank guarantee is an agreement concluded between the customer and the bank, and ensures fulfillment of the client's obligations in relation to the supplier. In other words, the aim of the bank guarantee is to ensure the supplier that provided by him products / services will be paid on time, excluding the insolvency of the buyer, any unforeseen situation or unilateral decision of the buyer on failure to fulfill the contractual obligations. In this case, an appropriate amount will be paid by the bank that provided a bank guarantee to the buyer.

The procedure and conditions of issue

The subject structure of the transaction is represented by three parties: the guarantor, the principal and the beneficiary.

Banking, credit or insurance institutions that take the obligation to pay the indicated amount act as a guarantor.

Principal is the buyer, the debtor under the guarantee obligation.

Beneficiary is a supplier, creditor of the principal and the recipient of the amount under the guarantee.

The essence of the bank guarantee is to ensure the payment obligations of the principal to the beneficiary.

The principal and the guarantor sign the agreement on issuance of a bank guarantee under certain conditions, for what the guarantor receives remuneration from the principal. The cost of the provided service depends on the subject of the issued guarantee, its term and the amount of it. The following point are stipulated in the agreement of the principal with the guarantor:

- the conditions of issuance

- documents which must provided by the beneficiary to receive payments under the guarantee

- the order of obligations fulfillment

- the amount and terms of fees payment to the guarantor by the principal

- the right of the guarantor to demand the amount of the guarantee from the principal indicating the sequence of his actions.

There are a number of mandatory conditions of a bank guarantee provision:

- availability of financial support and encumbrance

- opening a bank account

- familiarization with the principal's financial status

It is also necessary to know the specific conditions on the part of the beneficiary, if any. The existence of such conditions is usually driven by a monetary obligation of the principal to the beneficiary, which, in turn, considers each specific guarantee to one of the types of bank guarantees.

Types

Among all the possible bank guarantees, there are several basic types of guarantees:

- payment, which allows the beneficiary to reduce the risks of non-payment of the agreed amount for provided goods / services by principal

- return of an advance which reduces the risk of the buyer

- financing the credit line

- tender

- banking customs

- stand by letter of credit

The essence of each of these guarantees lies in minimizing the risks in the transaction. However, the basis for the issuance of guarantees affects the documents requested by the guarantor.

The necessary documents

Specifying all the necessary conditions with the beneficiary, the principal must provide a set of documents to the guarantor. The credit institution, issuing the guarantee, has the right to request any additional documents at its own discretion, in order to ensure the reliability of the client. The standard list of documents for bank guarantee, prepared by the principal, as follows:

1. Completed application of the defined by the bank form on guarantee issuance and signed by the principal.

2. A completed application of the defined by the bank by the principal.

3. Analytical tables made according to the standard form of the bank.

4. The founding documents of the company / organization of the principal.

5. A copy of the signed agreement, which is the basis for the issuance of bank guarantee.

6. The tender documentation (if the principal is involved in the tender).

7. The project text. If the principal has not provided own version, the bank offers a template, which must be approved by both contractual parties.

8. Copies of passports of all the designated individuals referred to in the guarantee and related documents (chief accountant, head, etc.).

Duration and implementation of commitments

The agreement between the principal and the guarantor must clearly establish the validity of the guarantee. The beneficiary may request payment of the guarantee amount only in defined terms, after which the bank will automatically void this guarantee. Since this financial instrument insures the risks of failure of a particular contract, guarantee agreements phrase like "the guarantee is valid till receiving goods / services" is fundamentally wrong, since it ruins the original meaning of a guarantee. Therefore, the validity period shall be defined as specifically as possible.

If the principal failed to fulfill his contractual obligations partially or completely, the performance guarantee of which is the bank, the beneficiary is entitled to demand payment of the guarantee amount from the guarantor. He provides the specified in the agreement documents to the bank which are thoroughly examined by the guarantor. If the documents provided by the beneficiary meet the stated requirements, the guarantor shall promptly, in accordance with the procedure on payment under the guarantee described in the agreement, pay the corresponding amount to the beneficiary.

Our Services

Not having sufficient experience in opening similar financial instruments or desiring to receive a bank guarantee on more favorable terms, you can make use of ProfInvest Services. We offer our costumers:

- assistance in the preparation of documents

- shorter waiting period for issuance of a bank guarantee

- cooperation with reliable and experienced specialists, the main priority of whom is the solution of your financial objectives

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