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What is a Bank Guarantee? What types of guarantees exist today?

Article image: What is a Bank Guarantee? What types of guarantees exist today?

Any business is related with risk in some way. That is why business partners often use a bank guarantee in order to ensure the safety of the negotiated transactions. In accordance with such a document, a bank assumes an obligation to pay a specified amount of money to the client if the contractor fails to fulfil the terms of the contract.

In fact, a bank guarantee is a loan product, but it is much cheaper than a cash loan. However, in this case, banks charge a certain commission fee, which is usually a percentage of the transaction amount.

The service of a bank in in UAE or abroad guarantee is rather attractive because it reduces possible risks of transactions and ensures full discharge of obligations specified in the contract. The parties to the bank guarantee are:

  • Beneficiary — the natural or legal person (client) who makes a payment request and who receives the amount of payment from the bank;
  • Principal — the initiator of issuing a bank guarantee (the borrower);
  • Guarantor — a financial institution (bank, insurance company), which assumes an obligation to make a payment to the person specified in the agreement immediately upon receiving a payment request.

Bank guarantees are beneficial not only for business owners, but for banks as well. Unlike a loan, they do not require immediate monetary coverage. Moreover, such payments on guarantees may be delayed for some time or even become not necessary at all. A commission fee for the provision of such guarantees is charged mandatorily and in full amount.

What are the types of bank guarantees In UAE?

The following types of bank guarantees are distinguished depending on the features of a transaction:

  • Payment guarantee — ensures timely payment for the delivered goods or rendered services;
  • Tender guarantee (tender bond) — ensures fulfilment of payment requests in case the successive tenderer refuses further cooperation (cancels application, does not sign a contract, etc.);
  • Tax and customs guarantees ensure fulfilment of obligations to the tax and customs authorities;
  • Advance payment guarantee — ensures refund of the advance payment, if the terms of the transaction are not fulfilled in terms of time or volume;
  • Performance guarantee — serves a guarantee that all the services, tasks or delivery of goods will be performed in full and in time.

A guarantee can be issued by the UAE bank itself or by another bank. In the first case it is a direct bank guarantee, in the other case — a counter-guarantee.

Depending on the terms of monetary payment, a bank guarantee can be either conditional or unconditional. In the case of a conditional guarantee a payment is made provided the availability of a written request of the beneficiary and the document confirming the fulfilment of obligations by the principal. If a bank guarantee in UAE is unconditional, the availability of a written request of the beneficiary is enough to make the payment.

Besides, bank guarantees can be unsecured and secured. If there is only a written commitment, the guarantee is unsecured. If there is any other way of its ensuring, for example, a pledge of property, the bank guarantee is considered as secured.

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