Bank guarantee – what is it?
A bank guarantee is a type of contract that is concluded by two parties: a private individual or an entrepreneur, and a bank. In this document, the institution undertakes to pay our creditor the entire amount of the benefit if we run into financial problems and we are unable to pay the remaining installments within the prescribed periods. Importantly, this solution involves the payment of various commissions to the lender, their amount may vary depending on the bank.
It is important to know that financial institutions most often provide bank guarantees to companies that run serious business activities that require large amounts of money. For example, thanks to the bank securing the debt, a given business will be able to convince another company that it will receive money for the purchased goods.
If a given company receives a bank guarantee, then it will also automatically gain a better chance of obtaining another financial liability (e.g. cash loan) in another institution.
Bank guarantee and banking law
It is certainly also worth getting acquainted with the explanation of the concept of a bank guarantee, which was included in the Act of 29 August 1997 – Banking Law. In this way, it will be easier to understand what security is involved by a financial institution.
In art. 81 of the Banking Law, we can read that:
1. The bank guarantee is the unilateral obligation of the bank-guarantor that after the authorized entity (the beneficiary of the guarantee) meets certain payment conditions, which can be confirmed by the documents specified in that assurance, which the beneficiary attaches to the payment request prepared in the form indicated, that bank will perform the provision in cash to the beneficiary of the guarantee – directly or through another bank.
2. A bank guarantee is granted and confirmed in writing, otherwise it is null and void. 1
What does the bank guarantee apply to?
Securing receivables is becoming more and more popular among both private individuals and entrepreneurs. This should not be surprising, however, because it contains a wide range of applications. Below we indicate in which situations the bank guarantee is most often used.
- settling the amount for purchased goods from another company,
- repayment of financial liability in the form of a cash loan,
- payment of customs duty,
- repayment of leasing installments,
- cash advance refund
Types of bank guarantees
Everyone who wants to take advantage of the bank guarantee should be aware of its types. In this way, you can find out how financial institutions can withdraw a specific amount of money to the beneficiary. Banks have two types of guarantees:
- conditional – the financial institution will pay funds to the beneficiary only if it meets all the conditions that have been included in the bank guarantee contract. It should be emphasized that in this situation the bank will check the validity of the claim based on the submitted documents.
- unconditional – in this case, the institution will pay the beneficiary the entire amount of money, but will not check the validity of the claim and require the submission of any documents that confirm this.
How to get a bank guarantee?
Before a financial institution grants a bank guarantee, it first carefully analyzes our credit standing. At this point, it should be emphasized that this is the most important factor that determines whether we will obtain collateral for receivables. In addition, the bank may ask you to open a bank account or secure the contract, for example by mortgaging our property.
After fulfilling the above conditions, the lender will require payment of several fees, including:
- consideration of the application for a bank guarantee,
- consideration of the order to grant security for claims,
- issuing a domestic promise of credit,
- a commission set by the bank for granting a bank guarantee.
Bank guarantee agreement – what elements should it contain?
A person applying for security of claims in a selected institution should be aware of what elements are included in the bank guarantee contract. In this way, it will be easier to understand what should be in the individual sections of this document.
Here are the most important aspects that should be included in the bank guarantee agreement:
- type of bank guarantee,
- information on what exactly is to be secured by receivables,
- the period during which the bank guarantee will apply,
- deadline by which the institution is required to withdraw a specific amount of money,
- the maximum amount that the bank will be able to pay out to the beneficiary,
- terms of payment of financial receivables,
When can the bank guarantee expire early?
You must know that each bank guarantee contract is made for us a definite period and ends with its expiration. This does not mean, however, that no document cannot lose its validity before. The document on securing claims will cease to apply if:
- the debt towards the creditor will be repaid and confirmed by an appropriate document,
- a private person or entrepreneur voluntarily waives the bank guarantee by returning the contract or confirms in writing the bank’s release from its financial obligations,
- for example, the amount set for payment to the creditor will be exhausted.
Will it definitely be a reasonable solution for a bank guarantee? It seems so, especially for people who have just started to develop their own enterprises and need to gain greater credibility in contacts with other companies and various contractors.