A bank guarantee is an independent, unconditional, and written commitment that a bank undertakes at the request of its client (Applicant) in favor of a third party (Beneficiary) to pay the amount specified in the guarantee upon presentation of a compliant demand. Typically, bank guarantees are governed by the URDG 758 rules adopted by the International Chamber of Commerce (ICC), unless otherwise stated in the guarantee.
Main Types of Bank Guarantees
- Advance Payment Guarantee - Issued when a buyer provides an advance payment to a supplier before the delivery of goods or services.
- Performance Guarantee / Performance Bond - Issued to ensure the proper performance of obligations specified in a contract.
- Tender / Bid Guarantee - Issued for participation in tenders or bids.
- Payment Guarantee - Used in open account trade transactions.
- Customs Guarantee - Issued in favor of customs authorities.
- Standby Letter of Credit (SBLC) - An independent payment instrument equivalent to a bank guarantee.
Advantages of Bank Guarantees
- Reduce commercial and financial risks,
- Ensure reliable execution of transactions,
- Allow for deferred payment terms,
- Facilitate long-term and trustworthy cooperation between partners,
- Serve as a more flexible and cost-effective tool compared to credit facilities.
