Bank guarantee what is it and what is it needed for.

The banking system, contrary to many misconceptions, can be quite safe. Additionally, banks can often act as guarantors. Therefore, understanding what a bank guarantee is in simple terms will be useful for many clients. Overall, it will not be superfluous to understand what it is (what a guarantee is) and what such a guarantee is needed for. 

A bank guarantee, what it is in simple terms: it is the obligations that the bank assumes, promising one of the parties to the transaction to pay a certain amount. Therefore, answering the question of what a bank guarantee is, it is a convenient and effective tool. 

What is a bank guarantee and what is it needed for

So, a bank guarantee is, in simple terms: it is the obligation of the bank to pay a certain amount of money to one of the parties to the transaction if the other party fails to fulfill its obligations. In simple terms, this is a safety net from the bank. However, the safety net has many nuances. 

In 2024, the bank guarantee remains an important financial instrument in Ukraine that allows business participants to protect their interests when entering into transactions. After all, even in wartime, many banks can act as guarantors. A bank guarantee in simple terms is, therefore, an important agreement that reduces certain risks. Hence, what a guarantee is for each party needs to be understood in detail. 

It should be stated right away who can be a participant in the transaction. We are talking about the guarantor. This is the bank that provides guarantees. There is also the principal — this is the bank client who requests the provision of a guarantee. The second participant in the transaction is the beneficiary. He is the one who receives the guarantee (the bank pays him the funds). 

A bank guarantee is not a loan. That is, the bank does not give money to anyone and does not pay for anyone without grounds. It is more of an insurance that allows the beneficiary to be confident in the fulfillment of the contract terms.

What types of guarantees are there from the bank? 

A bank guarantee is a tool that has been used for a long Time, and over time, different types have emerged, designed to perform specific tasks. Depending on the purpose of the operation, several main types of guarantees are distinguished.

The types of bank guarantees that are in demand in Ukraine in 2024 are:

1. Payment guarantee. This type of guarantee helps fulfill payment obligations. The bank undertakes the obligation that the principal will make payment for the goods or services within the specified time. Thus, the financial risk for suppliers is reduced, as they can be confident that the payment will arrive on time.

2. Performance guarantee. This type of guarantee protects the beneficiary in case the principal does not comply with the terms of the contract. Most often, such a guarantee is used in construction, logistics, and other industries where timing and quality of services are crucial.

3. Tender participation guarantee. Such a guarantee is required when participating in tender and bidding processes. It confirms that the participant undertakes to fulfill the terms of the offer and sign a contract upon winning. This is especially relevant for government and commercial tenders, as it helps avoid unfair behavior from participants.

Less commonly used is the guarantee for customs procedures. In this case, the bank ensures compliance with obligations to the state (at customs). This type is especially important for companies engaged in foreign economic activity.

Main stages of obtaining a bank guarantee

To obtain a bank guarantee, several stages must be completed:

1. Submitting an application to the bank. The principal submits an application for the guarantee and attaches all necessary documents: the contract with the beneficiary, financial statements, etc.

2. Application analysis. The bank conducts a detailed analysis of the financial condition of the principal to assess possible risks and make an informed decision regarding the issuance of the guarantee.

3. Conclusion of the contract. In case of a positive decision, the bank signs a contract with the principal, specifying all the terms of the guarantee.

4. Issuance of the guarantee. After signing the contract, the bank sends a letter of guarantee to the beneficiary, detailing all the particulars, including the amount of the obligation.

5. Fulfillment of the contract terms. If the principal complies with its obligations, the guarantee automatically ceases to be in effect. In case of violation of the terms, the bank pays the agreed amount to the beneficiary.

A bank guarantee has its advantages. Among them: 

1. Protection against risks — beneficiaries feel confident knowing that their interests are protected.

2. Opportunity to enter into new contracts — companies prefer to cooperate with partners who have a bank guarantee.

3. Acceleration of contractual processes — the presence of a guarantee simplifies the process of signing contracts.

Among the disadvantages, one can note: additional expenses, as well as additional administrative procedures.