Duration and types of bank guarantees

 

Types of bank guarantees and their duration

Duration and types of bank guarantees

The use of a particular financial instrument depends on the sphere of activity of the contracting parties, as well as on the conditions of interaction between them. The bank guarantee, widely used in modern trade, is divided into several types, which allows financing all sorts of transactions with it.

Definition of the bank guarantee

There are a number of reasons that can lead to non-fulfillment of the agreement. These reasons may depend or not on the intention of the contracting parties. Therefore, to ensure fulfillment of the predetermined conditions, the principal (customer) and the beneficiary (executer) can resort to the use of various types of warranties and bank guarantees.

A bank guarantee is a written obligation of the bank that it will pay the beneficiary the previously agreed sum in case of both complete and partial violation of the terms of the signed contract by the principal.

Since the bank guarantee is his resources-free instrument (the borrower or the bank does not directly use their money), it often turns out to be more efficient and low-cost product, compared with lending.

Bank guarantees are often successfully used by companies that carry out foreign trade activity. This is due to the high risk of legal collisions between the contracting parties from different legal systems occurrence.

Types of bank guarantees

There are various bank guarantees, which service different areas of business. The basic types of guarantees are the following:

1.Payment.

Is an obligation of the guarantor to pay predetermined amount to the beneficiary for non-compliance of the payment obligations undertaken by the principal under the contract.

Payment guarantees are confirmation of the solvency of the customer and help to build a foundation for further effective cooperation both for the short and long term period.

2.Fulfillment.

Serves to ensure fulfillment of the obligations by the supplier of goods or services under the contract. In other words, is used if needed to compensate the losses of the customer. This guarantee ensures payment of penalties by the supplier. In practice, it is a pre-agreed percentage from the total amount of his obligations established by the agreement.

3. Refund.

When the transaction requires mandatory prepayments, this type of guarantee is applied. It ensures that the guarantor will reimburse the advanced payment which has already been done by a customer in case of violation of the delivery of goods / services process by the seller or their non-compliance with the contract.

4. Customs.

Optimizes the relations with the customs authorities for the contracting parties during both import and export, as well as during the storage of various goods.

5. Conditional or unconditional.

Defines the scope of the conditions under which the guarantor will pay the guarantee amount to the beneficiary. Conditional and unconditional guarantees are distinguished, in the first case the guarantor shall pay the amount on the first request of the creditor; and in the in the second case – after provision of the necessary documents.

6. Provision of the loans.

Provides the return of the loan and / or interest to the lender.

7. Tender.

Serves to fulfill the terms of the tender / competition / auction by the principal to the organizer.

8. Revocable or irrevocable.

This type determines whether the guarantee has the possibility to revoke a guarantee that had been previously issued by him. In other words, to revoke the obligations he undertook and change the conditions at sole discretion. This type of guarantee can provide the highest degree of protection of the interests of all the contracting parties, therefore, as a rule, irrevocable bank guarantee is usually used in contractual relations.

The list of bank guarantees is still growing, while the scope of application of this instrument in modern trade is expanding.

The bank guarantee term

Definition of the terms is one of the conditions of a bank guarantee, which is mandatory. If this point is not settled, the agreement on provision of a bank guarantee is considered invalid.

Both contracting parties agree on the terms and prescribe them in the agreement. Standard indicators exist for all types of guarantees, as well as for bank guarantees. For example, the validity of the bank guarantee under the state agreement is indicated in normal conditions as the sum of the duration of a state contract plus a calendar month.

Bank guarantee, as a rule, shall enter into force on the day of its issue, except as other has been agreed in the terms of its provision. The term of the bank guarantee is specified in the agreement with the guarantor. It is specified by a specific date obligatorily. All other options pointing at any event (for example, "the time of receipt of goods / end of work" etc.) are not reliable and can not ensure the optimal use of the instrument.

If the parties consider it necessary to appoint the term with a certain event, in this case, the event which for sure will happen is used.

The term of the bank guarantee determines the length of time during which the beneficiary may require the guarantor to pay the guarantee amount if contractual obligations are not fulfilled by the principal. In case of expiry of the contract, addressing of the beneficiary to the guarantor with this requirement is unreasonable and can not be satisfied.

Termination of the bank guarantee is possible under the following conditions:

- expiry of the guarantee's validity

- if the beneficiary has received the proper amount

- after a written refusal of the beneficiary from his rights for various reasons and quittance of the guarantor from his obligations

Validity can be increased in the event of force majeure circumstances, preventing the contracting parties to execute the agreement in the timescale available. Since the bank guarantee is designed, first and foremost, to protect the interests of the beneficiary, he is the one to take the lead in increasing the term of the guarantee.

Terms of bank guarantee provision to the customer

In practice, the bank performs processing of applications and documents that have been filed for the provision of guarantees, during the period from two to three weeks. Moreover, processing the set of documents for the first time, it is easy to make a mistake or any inaccuracy in the formulation, leading to re-drafting of any paper. Choosing a credit institution that can act as guarantor will take a lot of time as well. Therefore, in order to save time and effort, it is necessary to address to the mediator with good contacts and algorithms. The average term of bank guarantee issue through a broker is 3-7 working days.

The task of our company - Profinvest Services - is precisely to help our customers to get a bank guarantee on favorable terms as soon as possible. We know exactly what banks to choose foe cooperation, how to collect the necessary documents efficiently and avoid unnecessary expenditures.

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