A letter of guarantee is a surety bond, addressed to a government agency or organization, or other natural or legal entities, in which the bank pledges to pay a stipulated amount under stipulated terms and conditions in the event that a contractor fails to fulfil some specified contractual obligation or duty.
Bank Guarantees or Bonds can be Conditional or Unconditional. When a guarantee is conditional, that anyone who wishes to claim under that guarantee must fulfil certain conditions before the guarantor is prepared to pay the appropriate sum to the beneficiary. When a guarantee is a simple demand guarantee, this means that the beneficiary named in the document is able to claim the benefit stated in the guarantee by simple demand.
A Bank Guarantee involves a financial institution providing a guarantee that a debt will not go unpaid. This kind of transaction gives the person or institution a safety net should the debtor be unable to make good on his borrowed money. If this situation does occur, the bank that provided the Bank Guarantee is responsible for the balance owed. Bank Guarantees can provide the necessary references to obtain a loan for goods or services. By procuring this type of instrument, a business will be able to purchase the needed capital to start or maintain their services to others. Since a bank is “backing” the customer, the institution providing the loan has no reason to find the customer unworthy of a loan. Whether the customer follows through or not, the loan will still be paid back without any hassle or interference of collections agencies.
The applicant fills an application form for issuance of a bank guarantee in which he specifies the name of the beneficiary, tenor, amount, expiry date and purpose of guarantee. The most commonly used guarantees are: Bid / Advance payment / Performance bonds / Customs guarantee and Payment guarantees.
Benefits:
Bank Guarantees are most useful when there is not a previous relationship between two parties. International transactions are one example of this necessary safety net. Since there is no pre-existing relationship, one party will have no proof that the other will follow through on his or her promises. A bank guarantee takes the risk out of this situation, and allows both parties to participate freely, knowing that the transaction will be followed through, whether by the original party, or by the bank offering the guarantee. Risks are certainly a part of business, but unnecessary ones are not.
The answer to this question is found in the answer to a few other questions, such as: Would you profit from transactions that you fear might not work out were you to become involved? Could you provide your services more freely and more widely if the risk of the other party not following through were lower? Simply put, a Bank Guarantee takes the fear out of stepping out on a ledge. If you know there is a safety net, you can feel free to not only walk, but do cartwheels. Think of how vast your connections and services could be if you just had a little bit of a safety net. That’s what a bank guarantee can do for your business.
MTG is often asked to assist in obtaining in the provision of Guarantees or Bonds on behalf of its customers, who may be importers or exporters, traders, middlemen or possibly contractors who have to give some form of undertaking to their counter-parties. The Guarantee is a written undertaking from a bank that if a customer does not honour an obligation to perform a particular function or service, the bank will pay over a sum of money on behalf of that customer to a named party.
