Bank guarantee
One of the most common and often used in practice guarantee methods is a bank guarantee. This is a fairly simple, affordable and reliable option for securing various obligations of one party for the obligations of the second party, provided by the bank as a third party to the transaction. Let us consider in more detail what a bank guarantee is, the conditions and cost of obtaining it, as well as the types of this guarantee that exist today in the domestic financial market.
Contents of the article:
- What is a bank guarantee
- How does a bank guarantee work?
- Participants in the process
- Bank guarantee conditions
- Bank guarantee cost
- Validity period of the bank guarantee
- Types of bank guarantees
- Advantages of a bank guarantee
- How does a bank guarantee work?
- How to get a bank guarantee
- How to check a bank guarantee
What is a bank guarantee
Simply put, a bank guarantee is a guarantee from another credit or insurance organization that one of the parties to the transaction will fulfill its obligations to the other. In case of failure to fulfill obligations, the guarantor/guarantor receives satisfaction. This support option is widely used in various fields of activity.
- Public procurement on a competitive basis;
- Organization of commercial tenders;
- Providing guarantees to borrowers when applying for loans;
- Refund guarantee, such as prepayment.
Paragraph 6 of the Civil Code of the Russian Federation. 368-379 contains several articles, the current version of which was adopted on March 8, 2015, after the adoption of the amendments contained in the text of No. 42-FZ.
How does a bank guarantee work?
The principles of operation of bank guarantees are very simple. The bank is obliged to fulfill the terms of the transaction if they were not fulfilled by one of the parties to the guarantee of the financial organization. As a rule, we are talking about payments of a certain amount. This must be stated in the agreement on the provision of a bank guarantee.
The presence of the latter is beneficial for all participants in the transaction. The lender or seller is guaranteed to receive the amount due to him. The buyer gets the opportunity to conclude a deal on terms favorable to him and generally enter into an agreement, for example, within the framework of government procurement. The bank or other guarantor receives payment in the form of a commission. Risk minimization is achieved through mandatory preliminary verification of the client or other standard lending methods. For example, security is obtained in the form of a pledge or other guarantee.
Participants in the process
Providing a bank guarantee requires mandatory participation in at least three aspects. Each has earned its name, and its function as part of the deal deserves its own consideration. First you must study list of banks issuing bank guarantees under Federal Law 44 and meeting the established requirements for accepting bank guarantees for tax purposes.
Principal
The party contacts a bank, credit or insurance company to obtain a guarantee. It is she who pays for the provision of financial services. A typical example of a principal under a bank guarantee is the winner of an electronic auction within the framework of public procurement. One of the mandatory conditions for concluding a government contract with him is a condition in the form of a certain amount or a bank guarantee. The second option is much simpler, cheaper and more profitable and therefore is used in practice in almost 100% of cases.
Beneficiary
The party receives money from the bank if it has not violated its financial obligations as a school principal. Most cases involve customers who require a bank guarantee to secure the fulfillment of a contract, or sellers who sell goods without full payment. If a bank guarantee is issued as part of an ordinary transaction between counterparties, the participant may act as a beneficiary.
Guarantor
The guarantor issued a documented obligation, in accordance with current legislation, to the bank, other credit or insurance company to make payments to the beneficiary if the principal does not fulfill the terms of the transaction. The addition of other financial market participants to banks occurred in 2015, when the above-mentioned paragraph 6 of the Civil Code of the Russian Federation (Part 1) acquired its current form.
Bank guarantee conditions
The provisions of the Civil Code strictly regulate the requirement to maintain bank guarantees. The document must contain the following information:
- Date of development;
- The names of all three interested parties – beneficiary, principal and guarantor;
- Warranty period;
- The obligation for which the guarantee is issued;
- Rules for the provision of bank guarantees or their calculation in the absence of an exact and predetermined amount;
- Circumstances under which an attack results in the payment of the guarantee amount.
The absence of any of the listed parameters gives grounds for the parties involved in the transaction to challenge the legality of the bank guarantee. In particular, in many cases the guarantor prepares a similar application. He believes that the conditions issued are invalid and refuses to pay the beneficiary. In such circumstances, the only way to get money is to file a lawsuit.
Therefore, it is usually not surprising that the beneficiary tries to participate in editing or at least adjusting the text of the bank guarantee. In many cases, a requirement to include additional terms and conditions in the document has been proposed. For example, an accurate and detailed list of documents that must be provided to the beneficiary for payment. In such situations, guarantors insist on demonstrating the need to demonstrate the documented commitment of the school principal.
No. 44 – (dated May 4, 2013) and No. 223 – (dated July 18, 2011). They refer to bank guarantees provided to secure obligations under government contracts. In this case, the document contains the following information:
- The guarantee cannot be invoked;
- Obligation to pay 0. 1% of the guarantee amount for each day of delay in payment;
- Termination of the guarantee obligation to the beneficiary’s current account from the moment the funds are received.
Customers of public procurement have the right to include other additional conditions in addition to those listed above. These may be explained in one of the following documents:
- Notifications on public procurement;
- Invitation to participate in electronic auctions or tenders in various formats;
- Draft government contract concluded with a supplier with sole status;
- Other documents included in the tender documentation.
Bank guarantee cost
The committee issuing the guarantee is determined by the internal rules and tariffs of the bank. Usually it varies within a fairly wide range – from 2% to 10%. The total cost of a bank guarantee is influenced by several factors:
- Cost of warranty;
- Warranty period;
- Nature of the transaction;
- Providing key support;
- Credit history of the recipient of the bank guarantee and other factors.
Validity period of the bank guarantee
The validity period of the bank’s guarantee obligation is determined by the type of guarantee and the agreement concluded by the parties. For example, in the case of tax guarantees, the validity period is at least 10 months for VAT and at least 6 months for excise duty, in both cases, counting from the date of submission of the tax report. If the obligation to perform government contracts is secured, the guarantee must exceed this period by at least one month. In the case of registration of guarantees based on ordinary transactions, the conditions are less strictly regulated and are determined by agreement of the parties.
Types of bank guarantees
The main criterion for classifying the guarantee method under consideration is the nature of the obligations guaranteed under the provision of a bank guarantee. In most cases, we are talking about four types of financial transactions.
Tender guarantee
In most cases we are talking about procurement. This is carried out either within the framework of meeting government needs, or at state-owned enterprises and companies. These procedures are governed by the federal laws mentioned above. In the first case, No. 4 4-FZ, in the second, No. 22 3-FZ.
The main function of a bank guarantee in this situation is to insure the interests of the customer against the behavior of an unscrupulous supplier. It is carried out by freeing government agencies and enterprises from the need to resolve the situation as fully as possible, transferring such disputes to the level of the bank and the main relationships.
A similar goal is pursued by the provision of tender guarantees in commercial procurement. There are three types of such guarantees:
- Participation in the transaction process;
- To conclude a contract after purchase;
- For high quality work, provision of services or supply of suitable goods.
Tax guarantee
Provides for participation as a beneficiary of tax authorities. The school director is a taxpayer who is unable to pay the required amount to the budget. In this case, he has the opportunity to apply for a deferment to the Federal Tax Service, which provides a bank tax guarantee for the obligation. There are three types of the latter:
- Expedited VAT refund;
- Excise duty;
- For other payments and mandatory fees – in agreement with the Federal Tax Service.
Official departmental Internet resource.
Customs guarantee
Issued when an importer wishes to collect late payment of duties on imported goods. Only authorized FCS banks issue such guarantees. Fees are paid after the sale of the goods – full or partial.
Contractual guarantee
The purpose of providing a guarantee is to protect one of the parties from violation of the terms of the contract by the second party to the transaction. Contractual guarantees come in several varieties, the three most popular of which are:
- Return forward;
- Payment for delivered products or services;
- Performance of work, provision of services or supply of goods.
Advantages of a bank guarantee
As mentioned above, when issuing a bank guarantee, each interested party receives certain benefits.
- Beneficiaries receive money quickly and with minimal formalities;
- Principal amount – significantly more favorable conditions than when applying for a conventional loan;
- The bank is a committee whose value fully compensates for the relatively low risk of the guarantee.
How does a bank guarantee work?
A simple example is enough to clearly demonstrate the behavioral mechanism of a bank guarantee. The Republican Hospital announced the purchase of specialized medical equipment. The procedure for its implementation is regulated by No. 44-FZ. Due to the provisions of the Federal Law, all bidders provide a bank guarantee to secure the bid.
Another important element of protecting the client’s interests is a bank guarantee for the execution of the contract for the supply of the above-mentioned equipment. If the winning supplier defaults for other reasons or defaults on its obligations, the hospital returns the advance payment and recovers other costs by filing a claim with the bank rather than through a lengthy legal process with unpredictable consequences for the guarantees. And all further problems in resolving disputes with suppliers fall on the financial organization, which has everything necessary for this – competent lawyers, serious experience, properly executed documentation.
How to get a bank guarantee
The procedure for issuing a bank guarantee involves the sequential implementation of several stages. Among them:
- Choice of guarantor. This is done by the school director. This service is available in almost all domestic banks. Selection criteria include terms of the offer, performance of the issue, credit rating of the financial institution and beneficiary requirements;
- Required documentation. The list of required documents is determined by the rules of the bank chosen for cooperation. As a rule, we are talking about documents related to security or other types of guarantees, such as constituent and registration documents, tax reports, etc.;
- Submitting an application to participate in the competition. This is a standard document for such transactions with banks, which usually also serves as a client questionnaire. The period for consideration of an application is determined by the rules of the financial institution and can vary from several minutes to a day or two to three days;
- Conclusion of an agreement between the principal and the guarantor. The document is prepared by bank experts. This does not mean that their content should not be carefully studied to take into account the interests of the client. All conditions for providing a guarantee are carefully analyzed and checked for compliance with the preliminary agreements of the parties;
- Payment of bank guarantees. This is done in accordance with the terms of the contract. Typically, since there is more than one payment involved, most of the money is paid up front. Although some banks are willing to issue guarantees without receiving payment, especially for regular customers who are definitely financially honest;
- Issuance of a bank guarantee. The final stage of the transaction. Ensures receipt of documented bank guarantee obligations. Requirements for the content of the document are given above. Today, it increasingly uses electronic guarantee formats instead of paper ones. In this case, it is a digital document. In some cases, for example, in connection with participation in public procurement, only electronic certification entered in the relevant register is used.
How to check a bank guarantee
Acquisition of ISS. The information was freely available until 2018. Today, the contents of the register are visible only to clients and banks, so checking a bank guarantee allows you to familiarize yourself with the official request issued. Another option is to contact the Federal Treasury, which keeps records of guarantees issued by financial organizations.
