A Bank guarantee is the promise of a commercial Bank that it will assume responsibility for a specific debtor, if the contractual obligations are not met. In other words, the Bank offers to stand as guarantor on behalf of the business client in the transaction. Most Bank guarantees ongoing fee equal to a small percentage of the total contract, usually between 0.5% and 1.5% of the guaranteed amount.
Applying for a Bank guarantee
The Bank guarantee is not restricted to business customers; citizens can apply for them also. However, companies receive the vast majority of guarantees. In most cases, Bank guarantees are not particularly difficult to obtain.
At the request of the guarantee, the account holder contacts the Bank and fills out an application, which determines the number and reasons for warranty. Typical applications determined specific period of time during which the guarantee is to be valid, any special conditions for the payment and details about the beneficiaries.
Sometimes the Bank requires collateral. This can be in the form of a pledge agreement on assets such as stocks, bonds or cash accounts. Illiquid assets generally not acceptable as collateral.
The reasons for the Bank guarantee
Several different types of Bank guarantees there is a guarantee of fulfillment of obligations, guarantees, bid bonds, financial guarantees, advance payment or deferred payment guarantee, among other things.
Bank guarantees are often part of the agreements between small firm and large organizations – public or private. Large organizations want to gain protection against counterparty risk, so it requires the smaller party will receive a Bank guarantee up to the job.