A bank guarantee is a surety or a guarantee issued by the bank on behalf of its customer for the benefit of a domestic or foreign beneficiary, with which the bank as the guarantor undertakes financial responsibility. A foreign bank guarantee refers to a guarantee issued for the benefit of a foreign beneficiary. An exporter or an importer can ask for a bank guarantee from its foreign trade partner to guarantee the fulfilling of all the contractual obligations. It is advisable for the exporter and the importer to make sure with the help of one's bank that the guarantee is valid and binding. A foreign guarantee can be issued as a surety or a guarantee on first demand.
A bank guarantee is issued by the bank on behalf of its customer, i.e. your company, for the benefit of a domestic beneficiary is usually directly enforceable and accessory to the principal obligation. In other words, the beneficiary has the right to claim its due receivables either from your company or directly from the guarantor bank. The bank is then able to present the same claims to the beneficiary as your company. In case of a surety, the bank is entitled to restrain payment to the beneficiary until your company's obligation to pay on the basis of a contractual relationship has been established. Sureties are governed by the Act on Guaranties and Third-Party Pledges (19.3.1999/361).
Guarantees on first demand are widely used in international trade. They are payable on demand, and the bank cannot refuse payment if it has received a claim that is formally valid. In case of a guarantee on first demand, the bank is obliged to pay the beneficiary on the grounds of the claim that is presented according to the provisions of the guarantee obligation without further examining whether the beneficiary has the right to receive the payment.
Standby letter of credit is a guarantee in a form of a letter of credit. It is an independent obligation in relation to the main contract and subject to the ICC Uniform Customs and Practice for Documentary Credits by the International Chamber of Commerce or to International Standby Practices Rules (ISP98).
Usually a bank guarantee is a direct guarantee between the contract partners, in which the bank issues the guarantee directly for the benefit of the foreign beneficiary. However, in some countries the legislation, currency regulations or the general customs of trade are against accepting guarantees from foreign banks. In such cases, a guarantee can be arranged through our correspondent bank as an assigned guarantee. We request the correspondent bank to issue a guarantee to your company's contract partner and oblige to reimburse the correspondent bank for all payments that it may have to make to the beneficiary on the basis of the guarantee.
A bid bond, also known as tender guarantee, compensates the damages if the exporter reverses the tender, refuses to sign the contract after the tender has been accepted or fails to arrange the performance bond presumed by the contract. Usually, the bid bond covers 2?5% of the value of the tender. The bid bond is valid from the submitting of the tender until its acceptance.
The contract partners may agree on a part of the contract price to be paid in advance. Advance payment bond or guarantee ensures that the buyer recovers the advance payment if the delivery is not accordant with the contractual obligations or if the delivery is not realised.
Performance bond or guarantee compensates the losses for the buyer in the event of non-performance of the performance obligations in the contract. The guarantee is valid from the signing of the contract until the delivery.
The exporter gives a warranty guarantee (also known as maintenance guarantee or retention money bond) when the delivery or the performance has been effected. The guarantee compensates the losses for the buyer if the exporter fails to reimburse the possible deficiencies or defects within the guarantee period.
A guarantee securing the payment of the purchase price is one of the most common guarantees associated with import trade. When the foreign seller gives the Finnish importer payment time after the delivery, the collateral is usually arranged either as a separate guarantee concerning a single transaction, as an aval, i.e. a guarantee for a bill of exchange accepted by the importer, or as an overdraft facility guarantee limit. Bank guarantee for a bill of exchange, also known as aval, is an international guarantee term. In Finland, it usually refers to a guarantee specified in the bill of exchange.
In addition to the aforementioned forms of guarantee, guarantees can be issued to secure various contractual obligations (for instance exclusive sales, leasing or rent agreement), or to fulfil some obligations to officials provided by the law or orders of the authorities (for instance customs guarantee). There are also many guarantees associated with financing.
Bill of lading guarantee is sometimes needed in import trade, for example when the products spoil quickly or have high storage costs in customs. If the original bills of lading are not yet at the importer's disposal, the importer can claim the product against the guarantee.
A customs guarantee is needed, for instance, when the importer requests temporary exemption from duty or a position as a charge customer from the customs authorities. A guarantee given for the community's customs procedure is comparable to a customs guarantee. The guarantee is given to Finnish authorities but it covers customs duties and other payments throughout the EU area that the customer has to pay.
Your company and the bank agree upon the issuance of a bank guarantee through a counter-obligation. The counter-obligation means that your company obliges to reimburse the bank for all payments that it may have to make on the basis of the bank guarantee. The counter-obligation also includes provisions on the guarantee fee charged on the bank guarantee and other terms and conditions between your company and the bank.
Your company can also be granted a guarantee limit that makes it easy to order bank guarantees from the bank without signing any separate counter-obligation. An order can also be submitted to the bank by Web services.
Read more about technical requirements