Introduction
A Bank Guarantee (more properly called a Banker’s Guarantee) is a banking arrangement whereby a bank substitutes its creditworthiness for that of its customer.
Unlike an L/C which is intended to be paid, a BG is a contingent obligation. “Contingent” means “depending on the happening of an event, which may or may not occur” and 99% of the time it is not paid because the event does not happen.
The terms SBLC and BG are interchangeable, both do the same work and both serve the same purpose. The difference between a BG and a SBLC is legal, a BG is a simple obligation subject to civil law whereas a SBLC is issued subject to UCP 500 and ISP 98, both well-accepted banking protocols. Both SBLCs or BGs can be issued and sent by Swift, telex, courier, mail, messenger or
pigeon. The mode of transmission does not matter.
What Is A Bank Guarantee?
A bank guarantee is a written obligation, or guarantee, from an issuing bank promising to pay a set sum of money to a beneficiary who is doing business with a client of the bank’s, in the event that the bank’s client defaults on the payment contractually promised to the beneficiary
TYPES OF GUARANTEES
Tender/Bid Guarantee
In practice tender guarantees or bid bonds are often used by a party to safeguard its interest in the event that the party submitting the tender withdraws prior to entering into a legally binding contract. If a party that has submitted a tender later withdraws it from the buyer this could cost the buyer dearly in terms of time and costs in retendering.
Advance Payment Guarantee
If the seller has requested an advance payment, then the buyer can request a bank guarantee to cover the advance payment in the event that the seller fails to fulfill its obligations as stipulated in the contract. This is rarely needed in sugar trading, as payment is usually made by a letter of credit, under which payment is only made to the seller in the event that the conditions of the contract are fulfilled.
Performance Guarantee
A performance bond guarantee is a bank guarantee which is issued by the seller and given to the buyer. If the seller fails to meet the terms of the contract, then the buyer is entitled to claim payment on the bank guarantee, which is normally around ten percent of the total value stipulated on the contract. It is standard practice for the seller to issue the buyer a performance bond guarantee.
Payment Guarantee
A payment guarantee is simply an assurance provided by the buyer to the seller that payment will be made upon shipping of goods. This is the most common form of bank guarantee usage in the global sugar trading industry, and buyers can expect most sellers to request a bank guarantee for the purpose of securing payment in the case of the buyer defaulting on the contract.
Retention Guarantee
supports an obligation to account for retention money made by the beneficiary to the principal/applicant. Retention guarantee may increase in accordance with the successive releases of the retention money. It is advisable that the Retention Guarantees/Standby explicitly stipulates that it does not take effect until the retention money has been received by the principal/applicants account at the issuing bank.
Warranty Guarantee
support remedies and any defects, which become apparent after delivery of the goods or after provisional or substantial completion of the plant.
Loan Guarantee
A loan guarantee is a promise by a person or an entity to assume a debt obligation in the event of non payment by the borrower. The person or entity that guarantees the loan is referred to as the guarantor.
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