BANK GUARANTEE

A Bank Guarantee is a promise by a bank or financial institution that the bank will make good the loss if a particular borrower fails to meet its obligations. A bank guarantee means that a financial institution ensures that a borrower's obligations will be met. In other words: If the debtor is unable to pay his debts, the bank will pay for them. A bank guarantee enables the customer or debtor to purchase goods, buy equipment or take out a loan. Bank Guarantees come in two swift messages (MT799 and MT760).

Swift MT799 is a pre-advise message between the sending bank and the receiving bank while the Swift MT760 is the Bank Guarantee. Banks cannot send a swift MT760 without first sending a swift MT799. A Bank Guarantee works similarly to a line of credit, except that a line of credit can be drawn down by the bank's customer at will. A Bank Guarantee is called only if the customer fails to pay its supplier an agreed amount. U.S. credit institutions are prohibited from assuming guarantee obligations, so a standby letter of credit is required for most international transactions.

Types of Bank Guarantees

  • A payment bond assures the seller that the purchase price will be paid on a specified date.

  •  An advance payment guarantee serves as security for the repayment of the buyer's advance payment if the seller fails to deliver the contracted goods.

  • A performance bond serves as security for the costs incurred by the buyer if the services or goods are not delivered as contracted.

  • A loan security bond that serves as collateral for the repayment of a loan.

What are the uses of a Bank Guarantee?

  • When large companies purchase from small vendors, they usually require the vendors to provide a bank guarantee before offering such business opportunities.

  • It is mainly used when buying and selling goods on credit, assuring the seller of payment by the bank in case of buyer default.

  • Helps in certifying the credibility of individuals, which in turn enables them to obtain loans and also help in business activities.​

Although a bank guarantee is of great benefit to the applicant, the bank should only provide the guarantee if it is satisfied of the financial stability of the applicant/business. The risk associated with providing such a guarantee must be thoroughly analysed by the bank.

DO YOU REQUIRE A BANK GUARANTEE TO CONCLUDE YOUR DEAL?