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What is a Bank Guarantee?

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Bank Guarantee Meaning.

A bank guarantee, also referred to as a letter of guarantee, is a binding obligation by the issuing bank to pay the beneficiary should the applicant fail to honour their financial and contractual obligations.

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Bank guarantees can be issued in two different ways :

Direct Guarantee.

The issuing bank, under instructions from their client (the provider), issues a guarantee direct to another bank (the receiving bank). This can be for the account of the beneficiary, or in some cases, direct to the beneficiary themselves.

Indirect Guarantee.

The providers bank requests their correspondent bank to issue a guarantee on their behalf. The correspondent bank becomes the issuing bank and will issue the guarantee, even though they do not hold the account of the provider.

Where a Guarantee is being utilised for monetisation, it is considered to be a Demand Bank Guarantee. This type of guarantee has specific verbiage and is governed by ICC Uniform Rules for Demand Bank Guarantees (URDG 758).

ICC refers to the International Chamber of Commerce (ICC). The purpose of the ICC is to set rules for global business, including international trade.

Bank Guarantees are issued for varying purposes, such as payment guarantees for customs and shipping guarantees. Therefore, each different guarantee will follow an exact format relating to their specific purpose.

Just because you are based in a particular country you do not have to use a bank based in that same country. It is usually the case that if your own bank is not willing to issue a Bank Guarantee to you, that an overseas bank may be able to help.

If this is the case then using an intermediary to facilitate an introduction to a bank could be of help as you would have no history with that bank.

We can make an introduction to relevant intermediary’s dependent on your status and requirements, regardless of the country in which you are based.

For further information on bank guarantee and the meaning of the different types of guarantees can be found on the here.

If you have any further questions on this or any other subject related to bank guarantees, then you can search our frequently asked questions where you will hopefully find the answer you are looking for. Alternatively you can ask us a question and we will answer it for you.

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