One way to ensure financial obligations when a lending institution, at the request of the principal, is to make payment to the beneficiary, are bank guarantees. These conditions are prescribed in the contract. A bank guarantee can be considered a payment document only if it is made in strict accordance with applicable law.
Essence
Bank guarantee agreement is one of the sought after financial instruments. By signing a document, the lending organization simply confirms the solvency of the contractor. But at the same time, it guarantees the fulfillment of obligations. Such an additional protection tool gives confidence in the performance of work on time.
Companies often work with government organizations. In this case, long-term cooperation agreements are usually concluded. When a certain sector of the economy is activated , a competition is announced for the work. One of the requirements that is presented to the winner is to provide a full package of documents for issuing bank guarantees. This confirms the seriousness of intentions.
Why is this needed?
The issuance of bank guarantees is most often carried out at the conclusion of contracts for large amounts. In this case, this tool acts as a kind of insurance for all groaning deals. The credit institution monitors compliance with the terms of the transaction. And even if the partner goes bankrupt, the beneficiary will still receive a reward. All types of bank guarantees and sureties are used to prevent the occurrence of financial risks.
Relationship Participants
- A guarantor bank (sometimes an insurance company) is an organization that assumes the obligation to make a payment to the beneficiary upon the occurrence of certain circumstances.
- Principal - debtor, borrower, person who pays a fee.
- Beneficiary - Beneficiary.
Type of bank guarantee
- Unconditional. The bank is obliged to transfer funds upon written request of the beneficiary. In this case, the statement must be drawn up in strict form.
- The statement of the beneficiary must be supported by documents that confirm the principal's failure to fulfill his obligations.
- Secured is a type of bank guarantee that is issued on bail.
- The fulfillment of obligations by the principal may be additionally confirmed by another bank, which is jointly and severally liable to the beneficiary. Several credit institutions may participate in the transaction. This type of bank guarantee is called syndicated. It is most often used in international transactions. The more banks involved, the more expensive the service will be.
- If the obligation is accepted by one credit institution, then this type of transaction is called direct. If the bank, on behalf of the principal, requires confirmation of the fulfillment of the terms of the transaction from another financial institution, then this is a counter guarantee. Such contracts are also more commonly used in international transactions.
Principle of operation
The lender provides funds to the principal. As a confirmation of fulfillment of obligations, a contract is concluded. If the borrower has not returned the funds, then the requirements are presented to the principal's bank. Copies of documents from the beneficiary are sent there. The indicated amount is transferred to the beneficiary's account. The credit institution may present to the principal claims of a recourse nature. The document comes into force from the moment of signing and is valid until the date stipulated by the time frame of deliveries.
Design steps
1. Submission of a pre-guarantee letter by the borrower with the consent of the guarantor bank to ensure repayment of the loan.
2. Obtaining permission from the financial institution of the beneficiary.
3. Drafting and signing of documents.
Nuances
A bank guarantee agreement is concluded between three parties: the principal, the beneficiary and the bank. The document records the amount of remuneration. In case of violation of the obligation, the bank will present to the principal a claim of a recourse nature. The amount of remuneration is also prescribed in advance in the document. The presence of this clause in the contract is beneficial primarily to the principal. The bank will not be able to make too high demands or overestimate the amount of penalties. A notarized copy of the credit institution's license must be attached to the contract.
Such agreements are highly reliable and quickly implemented instruments that bring additional financial income to the financial institution and do not require the diversion of funds from circulation. Russian financial institutions draw up such documents, provided that the client has a bank guarantee (securities, goods and materials, etc.), and they work with old partners on the condition of direct debit of the amount from the account.
The contract is concluded only in writing and must be sealed and signed by the parties. The document should also state that:
- the beneficiary will receive the full amount specified in the contract;
- the validity of the document is limited;
- if the beneficiary refuses to receive remuneration, he must return the guarantee to the organization that provided it.
Other information:
- Name of the parties (guarantor and principal).
- The name of the documents for the supply of goods.
- Maximum payout amount.
- Warranty Terms.
- Terms of termination of the contract.
- Rules for making payments.
Conclusion
To confirm the seriousness of intentions and minimize financial risks, especially when concluding international transactions, participants can issue a bank guarantee. The credit institution undertakes to transfer money to the beneficiary's account upon the occurrence of certain conditions. Regardless of what type of bank guarantee is used, the financial institution simply confirms the solvency of the client. Paperwork will cost 1-5% of the transaction amount. Credit is more expensive. And counterparties are quicker to cooperate if the client agrees to sign a bank guarantee.