One of the most commonly used instruments for mitigating business risks is the bank guarantee as a written and irrevocable commitment. What do you mean by this in more detail, what is the cost of a bank guarantee and what is the difference between a non-payment bank guarantee and a payment bank guarantee?
What is a bank guarantee?
A bank guarantee is a written declaration by the bank that it will satisfy the creditor up to a specific amount of money according to the contents of the guarantee document if the debtor fails to fulfil its obligation or if other conditions specified in the guarantee document are not met.
In a very simplistic way, we can say that it is a promise by the bank that it will pay out money if the conditions are met. You must also take into account the price of the bank guarantee, which is set individually by each institution.
At least 3 entities are involved in the provision of the guarantee, namely the beneficiary, the principal and the guaranteeing bank as guarantor.
Did you know that a letter of guarantee must be in writing and a contract must be signed between the bank and the principal before it is issued? The letter of guarantee must then state:
- Name and address of the recipient
- Name and address of the principal
- Guarantor of the guarantee
- Amount and currency of the guaranteed amount
- Period of validity of the guarantee
- Conditions for payment of the guarantee
Payment or non-payment guarantee?
When it comes to warranty, there are two types.
- Payment guarantees as security for repayment of loans, invoices, bills of exchange or lease payments
- Non-payment guarantees, e.g. bail bonds, public contract security, advance payment guarantees, etc.