The bank guarantee for dummies

If you happen to have a project in mind but have trouble securing the necessary funds, you should know that taking out a loan from a bank is one of the best resorts. But doing so is not easy, hence the availability of several guarantee schemes out there, including the bank one. Here is what the latter consists of.

What exactly is a bank guarantee?

According to the Civil Code, the bank guarantee is established so that the bank can substitute itself for the creditor if the latter is unable to fulfill its commitments. In other words, it refers to the irrevocable commitment made by a bank to pay a certain sum to a beneficiary if a third party is unable to perform the agreed service. It is a unilateral contract involving three parties: the originator, the bank and the beneficiary. The relationships between them are governed by the basic contract (between the principal and the beneficiary), the guarantee contract (between the principal and the bank) and the unilateral contract (between the bank and the beneficiary). But to know who should adhere to the bank guarantee, it is necessary to understand how this type of guarantee works.

What are the common types of bank guarantees?

There are four types of bank guarantees: first demand guarantees, documentary guarantees, direct guarantees and indirect guarantees. For the first type, the beneficiary must send his or her request for payment before the deadline agreed in the guarantee. For the second type, they are payable based on documents issued by third parties. In the case of the direct guarantee, it is marked by the direct issue of a guarantee in favour of the beneficiary by the principal’s bank. Finally, the indirect guarantee consists of the issuing of the guarantee based on the ordering bank instructions by the second bank.

The benefits of taking out a bank guarantee

The main benefit of taking out a bank guarantee is that it helps in applying for a loan. Indeed, it will be much easier to convince the lender of the soundness of the project. Furthermore, the implementation of a bank guarantee is much less expensive than a conventional mortgage because no notary’s visit is required. It also strengthens the credibility of the guaranteed company and provides a means of perpetuating commercial relations.