Bank guarantees

A bank guarantee is a type of financial backstop offered by a lending institution.

Bank guarantees

A bank guarantee is a type of financial backstop offered by a lending institution. The bank guarantee means that the lender will ensure that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it. A bank guarantee enables the customer, or debtor, to acquire goods, buy equipment or draw down a loan.

Key takeaways

A Bank Guarantee (BG) is very similar to a Letter Of Credit (LC) as they both are used for many types of business transactions (financial or performance based). The real difference between the two is that a Letter Of Credit (LC) ensures that a business transaction goes as planned, whereas a Bank Guarantee (BG) reduces losses if a business transaction doesn’t go as planned. A Bank Guarantee (BG) guarantees a certain sum to the beneficiary if the opposing party doesn’t fulfill its specific obligations under their agreed upon contract. Bank Guarantees (BG) ensure both sides in a contractual agreement from credit risk.  A construction company and its steel beam supplier may enter into a contractual agreement to build a new complex. Both sides might have to issue Bank Guarantees (BG) in order to prove their credit-worthiness to each other. 

In a case that the steel beam supplier fails to deliver steel beams to the job site per their agreed contractual agreement, the construction company would notify the issuing bank of the breach of terms agreed up in the Bank Guarantee (BG) and the bank would then pay the construction company the amount agreed upon in the Bank Guarantee (BG).

How does the bank guarantee (BG)  process work?

Bank guarantee closing process

Fill out and return the Bank Guarantee (BG) application with the documents for your deal. (Contract, Agreement, etc.)

A SWIFT MT760 draft of the Bank Guarantee (BG) will be created for you and your beneficiary to review.

a)Finalize the draft between you and your beneficiary and sign off on the draft (changes are free of cost).

b)We issue you a payment invoice for the BG, which you arrange to pay.

c) Once we receive your wire payment, we will release the finalized Bank Guarantee (BG) to the bank for issuance and delivery.

More often than not, the bank will issue the Bank Guarantee (BG) within 48 hours of release.

Once issued, a copy of the BG will be emailed to you as it is transmitted by a MT760 SWIFT message to the beneficiary, including the reference number of the BG.

Your seller’s bank will be able to receive and confirm the Bank Guarantee (BG) transmission soon thereafter.

What are types of bank guarantees?(BG)

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11, Kyriakou Matsi Str., Nikis Center, 3rd Floor – Office 303 P.O Box 23282-1680 Nicosia – Cyprus

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