A bank guarantee serves as a promise from a commercial bank that the liability of a particular debtor will be met if contractual obligations are not met. The bank offers to stand as the guarantor on behalf of a business customer in a transaction. Most bank guarantees come with a fee equal to a small percentage amount of the entire contract, normally 0.5% to 1.5% of the guaranteed amount.
Applying for a Bank Guarantee
Bank guarantees are not limited to business customers; individuals can apply for them as well. However, businesses do receive the vast majority of guarantees. In most cases, bank guarantees are not particularly difficult to obtain.
To request a guarantee, the account holder contacts the bank and fills out an application that identifies the amount of and reasons for the guarantee. Typical applications stipulate a specific period of time for which the guarantee should be valid, any special conditions for payment and details about the beneficiary.
Sometimes the bank requires collateral. This can be in the form of a pledge agreement for assets, such as stocks, bonds or cash accounts. Illiquid assets are generally not acceptable as collateral.
Reasons for a Bank Guarantee
Several different kinds of bank guarantees exist: performance guarantees, bid bond guarantees, financial guarantees, advance or deferred payment guarantees, among others.
Bank guarantees are often part of arrangements between a small firm and a large organization – public or private. The larger organization wants protection against counterparty risk, so it requires that the smaller party receive a bank guarantee in advance of work.