Bank guarantee: give suppliers and clients certainty
When dealing with large contracts or advance payments, a supplier or client wants to be sure that you will pay. But you may not want to set aside funds for this. A bank guarantee can be the solution: it means you can provide assurance without making an immediate payment.
What is a bank guarantee?
A bank guarantee is a written confirmation from the bank that it will pay the amount due to your supplier or client if you are unable to do so. This way, your supplier or client can be sure that the payment will be made.
A bank guarantee demonstrates that you are reliable and can give you certain advantages. For example, you might not have to pay a deposit, you may pay a lower rate, or you may be allowed to pay later.
When do you need a bank guarantee?
You may need a bank guarantee if the person you are doing business with wants financial security. For example, when:
- renting business premises
- taking part in tenders
- supplying goods or services
- paying in advance for larger contracts
How does a bank guarantee work?
When you apply for a bank guarantee, the bank wants to be sure that you can meet your financial obligations. So the bank looks at:
- your finances
- your credit limit (how much you are allowed to borrow)
- your liquidity (money in your bank account and in cash that you can use immediately)
- the purpose of the guarantee
After approving your application:
- the bank draws up a guarantee statement
- your supplier or client receives this statement
- the bank pays out if you are unable to meet your payment obligations
The bank blocks a sum
The bank wants to minimise its risk. So it usually blocks an amount in your account equal to the value of the guarantee. Sometimes this amount is deducted from your credit limit. This means you cannot borrow that portion temporarily.
What does a bank guarantee cost?
A bank charges:
- fees for applying for or changing a bank guarantee
- commission fee on the guarantee amount during the term
- fees for any extra services, such as urgent processing
A bank guarantee is often cheaper than a loan.
What types of bank guarantees are there?
There are different types of bank guarantees for different purposes:
- Advance payment guarantee: security for advance payments
- Payment guarantee: security that payment will be made
- Maintenance guarantee: security for maintenance after completion
- Bid guarantee: required for tenders
- Rental guarantee: an alternative to a security deposit for rent
- Performance guarantee: for contracts or projects
- Customs guarantee: for customs obligations
The pros and cons of a bank guarantee
Advantages
- you demonstrate that you are reliable
- you sometimes do not need to pay money upfront
- you pay less or are allowed to pay later
Disadvantages
- the bank usually blocks the guaranteed amount
- the bank often deducts the guarantee amount from your credit limit
- you have temporarily less financial flexibility
More options for financial security
In addition to a bank guarantee and a bank loan, there are other ways to obtain or provide greater financial security. For example: