What is bank guarantee?

Usefulness of bank guarantee

In the case of a guarantee, the bank gives the recipient of the guarantee the promise to pay compensation in the extent of the guarantee amount if the recipient of the guarantee demands it from the bank. The purpose of a guarantee is to offer the recipient security and quick monetary compensation if the other party to the contract fails to perform its obligations.

It helps to reduce the risks arising from contracts.
It allows the recipient to receive monetary compensation quickly and easily.
It helps to avoid the risks associated with advance payments.
It is suitable for covering very different risks.

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Guarantees can be processed according to the following international rules:

CC Uniform Rules for Demand Guarantees, Publication No. 758, abbreviation URDG, issued by the International Chamber of Commerce (ICC);
International Standby Practices ISP98, Publication No. 590 of the International Chamber of Commerce.

You can also read more about guarantees in the Swedbank brochure Documentary.

Credit, Collection and Bank Guarantees

Use of Guarantees in Transactions

The client who orders the guarantee submits an application to its bank requesting that the latter guarantee the performance of a contractual obligation (e.g. payment for goods, provision of a service, etc.). Since the bank undertakes to pay monetary compensation to the recipient when issuing a guarantee, the bank has to make a credit decision about the guarantee applicant before it issues the guarantee.
The recipient of the guarantee will demand monetary compensation from the bank if it believes that its contract partner has failed to perform its obligations. The bank pays the amount of the claim to the recipient of the guarantee on the basis of a written claim and collects the amount from the client who ordered the guarantee. The guarantee will expire without being used if the transaction is completed without problems.