A bank guarantee is a ‘promise’ to underwrite or make payment to a third party, on certain terms. Often a third party will request a guarantee of payment upon dispatching its goods or services to another party, and a bank can guarantee this payment through a contractual obligation.
A bank guarantee is a generic term and there are several types of bank guarantee that can help businesses.
As an example, say a small client is dealing with a multinational company on a project, they might require some form of promise to have the relevant financial backing to complete that project. A bank would conduct due diligence on the small company and would act as a ‘guarantor’ to the multinational company; ensuring that the small client will complete the project on certain terms.
A bank guarantee is a ‘surety bond’ which is often addressed to a larger institution of corporate by which the bank pledges (and contractually agrees) to pay an agreed amount under stipulated conditions.
Applicants need to demonstrate financial credit worthiness to their bank, or the bank offering to guarantee payment to another party in order to access a guarantee.
The bank would normally look at previous trading history, recent accounts, credit history and liquidity. The bank would normally need to know how long the bank guarantee is required for, the amount and currency, beneficiary details and any other conditions that might be required. A bank might ask for some security over the guarantee (e.g. liquid assets such as property or equipment it holds, and maybe a personal or directors guarantee).
For elligible, you must be beneficiary and owner of your bank guarantee. It must be secured on real assets (cash, …..), and confirmable by the bank that issued it by SWIFT banking.
If you meet the conditions, your bank guarantee may be eligible for a trading program.