Security is often required to underpin a financial transaction and a Bank Guarantee or Letter of Guarantee is regularly used to fulfil this requirement where the Issuing Bank guarantees to pay should the beneficiary of the Bank Guarantee fail to meet their underlying obligations of the relevant transaction. Issuing a Bank Guarantees is an uncomplicated process, where the bank that issues the Bank Guarantee (The Issuing Bank), transfers the Bank Guarantee on instructions received from their client (The Provider or Applicant), to another bank, (The Receiving Bank), for the account of their client, (The Beneficiary). There are many different Bank Guarantees including direct and indirect Bank Guarantees as outlined below.

It is pertinent to point out that a Bank Guarantee (BG) differs from a Standby Letter of Credit (SBLC) and a Documentary Letter of Credit (DLC). It is a common misnomer that all three instruments are bracketed as the same form of payment. This is not correct as a Standby and Documentary Letters of Credit are a MEANS of payment and a Bank Guarantee is SECURITY for a payment.

The law relating to Bank Guarantees is governed by the country of origin. For example, if the issuing bank is domiciled in Geneva then the Bank Guarantee is governed by the laws of Switzerland and if the issuing bank is domiciled in London the Bank Guarantee is governed by the laws of England. It is therefore imperative each Bank guarantee is examined individually to ascertain any legal rulings that may affect the transaction and beneficiary.

As previously advised, Bank Guarantees come in many separate formats. A Direct Bank Guarantee is where a bank transfers a Bank Guarantee direct to another bank. An Indirect Bank Guarantee is where the Issuing Bank instructs their correspondent bank, to issue a Bank Guarantee on behalf of their client, to the beneficiary’s bank. It is important to mention at this juncture the difference between a Bank Guarantee and a Surety Bond or Performance Guarantee. A Bank Guarantee is payable on Demand whereas a Surety Bond will only pay out subject to certain criteria being met, as it is a form of insurance.

A Collateral Transfer Facility is regularly used to raise a line of credit, secure loans or secure a capital injection which are referred to as Credit Facility Guarantees. Collateral Transfer Facilities use Demand Guarantees, which as the name suggests, is payable on FIRST DEMAND, and follows a strict format as per ICC Uniform Rules for Demand Guarantees, (URDG 760).