Skip to main content
lease securites

Different Types of Bank Guarantees

Today we are going to look at the different types of Bank Guarantees and understand how these Bank Guarantees can help your business. First, we will differentiate between the two types of Bank Guarantee…

Financial Guarantee – a guarantee of payment to the beneficiary by the issuing bank. This occurs when the provider of the Bank Guarantee defaults on payment. 

Performance Guarantee – guarantees all losses to the beneficiary by the issuing bank. This occurs when the provider is deemed guilty of non-performance on the underlying contract. 

Please note the provider is the counter-party to the beneficiary in the underlying contract. 

Six Most Popular Guarantees along with their Definitions 

  1. Guarantee of Payment – This is a financial guarantee often referred to as a payment guarantee. This guarantee for example underwrites sellers, including exporters, of goods or builders. This allows the beneficiary of the guarantee to enter into a contract with the provider of the guarantee. It guarantees payment if the buyer or financier defaults on payment. This guarantee works for both parties of the contract. If the buyer has a dodgy credit rating this guarantee allows them to contract with the seller. Likewise, if the seller feels the buyer may not pay, this guarantee gives them the desired comfort. 
  1. Contract Execution Guarantee – This is a performance guarantee. The beneficiary of this contract, usually construction, is protected from non-fulfilment of contract. The beneficiary can claim the full amount of the guarantee, unless it exceeds the loss incurred. The main advantage of this guarantees is that it facilitates the execution of the contract. This of course is beneficial to both parties. 
  1. Tender Guarantee – This is a performance guarantee. As the name suggests the provider is tendering for a contract. The tender guarantee is issued for a stipulated period as per the tender documents. They are very common in construction projects. The amount is usually between 5% and 10% of the total contract amount. The company offering the tender is protected by the tender guarantee. It ensures workable bids are submitted. It ensures tenderers comply with the terms of the contract if their bid is accepted. 
  1. Warranty Execution Guarantee – This again is a performance guarantee usually found in construction projects. Here the provider is guaranteeing that their work will be up to a specified standard. If the beneficiary of the guarantee can prove the completed work is not up to the standard required, they can claim any losses under the guarantee. This saves lengthy court cases for both sides. It also usually ensures the work is up to the standard required. 
  1. Customs Guarantee – This is a financial guarantee where The Customs are the beneficiary. The issuing bank guarantees all customs duties and taxes will be paid. This will be enforced should the provider default on their fiduciary duty to the customs. This is essential for company’s clearing goods through customs. Usually for clients moving large amounts of goods through customs more than three times a year. They can set up a duty deferment account. This means they can clear customs quickly without paying a penny. The company then must pay within a stipulated period. If they renege on payment, customs can claim against the guarantee. 
  1. Advance Payment Guarantee – This is a financial guarantee that covers advance payments or deposits by the buyer. This is where the seller fails to deliver on a contract. The advance payment guarantee will cover the loss of the buyer if the seller fails to refund the advance payment. The buyer may feel the sellers’ credit rating is not good enough. The guarantee gives the buyer comfort in the event they have to make an advance payment. This gives both parties an agreeable solution allowing the trade to take place. 

To understand how the different types of bank guarantees can help your business, please get in touch or contact IntaCapital Swiss for bespoke information.