Bank Guarantees – Explained
The role of the Bank Guarantee has proved vital in these days of strict credit control. A Bank Guarantee, whether a direct or indirect Bank Guarantee, is used as security to guarantee an obligation to repay a loan or line of credit. The Bank Guarantee is transferred from one bank, (The issuing Bank), on instructions from their client, (The Provider or Applicant), to another bank, (The Receiving Bank), favouring their client (The Beneficiary).
At this juncture, it is appropriate to explain the differing underlying reimbursement instructions between a Bank Guarantee (BG), a Standby Letter of Credit, (SBLC), and a Documentary Letter of Credit (DLC). A Bank Guarantee acts as a SECURITY for payment whereas Standby and Documentary Letters of Credit are a MEANS of payment.
It is most important to be aware of the legal issues surrounding Bank Guarantees especially which country’s laws are applicable. The simple answer is laws relating to Bank Guarantees are governed by the country where the Issuing Bank is Domiciled. It is imperative therefore that each Bank Guarantee is examined on a separate basis, as laws differ from jurisdiction to jurisdiction.
There are many different guarantees, such as a straight Bank Guarantee, Counter Guarantee, Performance Guaranty and Surety Bonds to name but a few. The Indirect Bank Guarantee is where an Issuing Bank instructs their correspondent bank to issue a Bank Guarantee on their behalf, whereas a Direct Bank Guarantee is where a bank transfers a Bank Guarantee direct to another bank. It is important understand the differences between a Performance Guaranty, a Surety Bond and a Bank Guaranty. The Performance Guarantee or Surety Bond has underlying insurance aspects and, as such only reimburses once certain criteria or conditions have been fulfilled. A Bank Guarantee is payable on DEMAND.
To raise a credit line or loan, known as Credit Facility Guarantees, a company will have to utilise a Demand Bank Guarantee using the medium of a Collateral Transfer Facility. The Demand Bank Guarantee is a specialised instrument using an exact format and is governed by ICC Uniform Rules for Demand Guarantees (URDG 760) and is payable on FIRST DEMAND.