Many borrowers in todays credit market are required to provide security to underpin a financial transaction. A Bank Guarantee is a perfect example of the type of security that is required. Transferred from one bank to another either by direct or indirect Bank Guarantee, a Bank Guarantee acts as security to the lender, should the borrower default on payment. Transferring the Bank Guarantee is a simple task as on instructions from their client (The Provider or Applicant), the Issuing Bank transfers the Bank Guarantee to another bank (The Receiving Bank), for account of their client (The Beneficiary).
Confusion surrounding the reimbursement instructions for Standby Letters of Credit, (SBLC’s), Documentary Letters of Credit, (DLC’s) and Bank Guarantees, BG’s), needs to be addressed as from time to time the above Letters of Credit have been requested to provide the security offered by a Bank Guarantee. A Bank Guarantee is SECURITY for a payment whereas Documentary and Standby Letters of Credit are a MEANS of payment.
All matters of law governing Bank Guarantees are provided by the country where the Issuing Bank is domiciled. It is therefore important to note that each Bank Guarantee must be examined on a case by case basis as financial laws differ from country to country.
All Bank Guarantees are defined as direct or indirect guarantees. The Direct Bank Guarantee (or any guarantee for that matter), is a simple process of transferring a Bank Guarantee from one bank to another. Under certain circumstances an Indirect Bank Guarantee is transferred by a correspondent bank to another bank under instructions received from the Issuing Bank. A guarantee is used for many different purposes and it is appropriate highlight the difference between a Bank Guarantee and a Surety Bond or Performance Guarantee. A Bank Guarantee is paid on DEMAND, whereas reimbursement under a Surety Bond or Performance Bond will only occur once certain criteria have been met.
The Collateral Transfer Facility is a popular way for companies to raise loans, lines of credit or to receive a capital injection, often referred to as Credit Facility Guarantees. The Collateral Transfer Facility utilises Demand Bank Guarantees, which are written with an exact verbiage. The Demand Bank Guarantee is Governed by ICC Uniform Rules for Demand Guarantees (URDG 760), and are payable on FIRST DEMAND.