WHAT IS A BANK GUARANTEE LETTER?
A Bank Guarantee (BG) letter is very similar to a Letter Of Credit (LC) as they are both used for many types of business transactions (financial based or performance based).
The real difference between the two is that a Letter Of Credit (LC) is a payment mechanism used in international trade to provide an economic guarantee from a creditworthy bank to an exporter of goods and also ensures that a business transaction goes as planned, whereas a Bank Guarantee (BG) is a promise from a lending institution that ensures that if a debtor can’t cover a debt, the bank will step up and take responsibility for the debtors failed debt.
A Bank Guarantee (BG) guarantees a certain sum to the beneficiary if the opposing party doesn’t fulfill its specific obligations under their agreed upon contract.
Bank Guarantees (BG) ensure both sides in a contractual agreement from credit risk.
A construction company and its steel beam supplier may enter into a contractual agreement to build a new complex.
Both sides might have to issue the bank a bank guarantee in order to prove their credit-worthiness to each other.
In a case that the steel beam supplier fails to deliver steel beams to the job site per their agreed contractual agreement, the construction company would notify the issuing bank of the breach of terms agreed up in the Bank Guarantee (BG) and the bank would then pay the construction company the amount agreed upon in the BG.
HOW DOES THE BANK GUARANTEE (BG)
Bank Guarantee Closing Process
Step 1: Application
Fill out and return the Bank Guarantee (BG) application with the documents for your deal. (Contract, Agreement, etc.)
Step 2: Issuing of Draft
A SWIFT MT760 draft of the Bank Guarantee (BG) will be created for you and your beneficiary to review.
Step 3: Draft Review and Opening Payment
a) Finalize the draft between you and your beneficiary and sign off on the draft (changes are free of cost).
b) We issue you a payment invoice for the Bank Guarantee (BG), which you have arranged to pay for.
c) Once we receive an alert regarding your wire payment, we will release the finalized Bank Guarantee (BG) to the bank for issuance and delivery.
Step 4: Issuance
More often than not, the bank will issue the Bank Guarantee (BG) within 48 hours of release.
Once issued, a copy of the Bank Guarantee(BG) letter will be emailed to you as it is transmitted by an MT760 SWIFT message to the beneficiary, including the reference number of the Bank Guarantee (BG).
Your seller’s bank will be able to receive and confirm the Bank Guarantee (BG) transmission soon thereafter.
WHAT ARE THE TYPES OF BANK GUARANTEE LETTERS
1) Bid Bond Guarantee:
This is issued as part of the supply bidding process between a contractor and the project owner, in order to provide a guarantee that the winning bidder will takeup the contract under the terms and conditions that they bid.
2) Performance Bond Guarantee:
Is a surety bond usually issued by a bank to guarantee the satisfactory completion of a project by a contractor.
This is also known as a contract bond.
3) Advance Payment Guarantee:
This is used whenever a contract includes advance payment to be made to the seller.
It guarantees that this advance payment will be returned to the buyer if the seller happens not to commit to his/her obligation to the seller.
4) Warranty Bond Guarantee:
A type of security bond that states that the contractor has a history of trustworthiness.
It also protects the client should the work completed be subpar or unethical in any way.
5) Payment Guarantee:
A financial commitment that requires a debtor to make a repayment due to the terms outlined in the debt agreement.
6) Rental Guarantee:
A type of insurance used to protect landlords against loss of rent.
7) Letter of Indemnity:
A letter that guarantees certain contractual provisions will be met or financial reparations will be made.
Guarantees that losses will not be suffered if the contractual provisions aren’t met.
8) Confirmed Payment Order Guarantee:
A guarantee of payment on a certain due date on top of the letter of credit issuing bank’s own commitment to pay the supplier.