A guarantee is a written undertaking issued by a bank or financial institution in favour of the receiver of the goods or services, whereby it pledges to make certain payments on behalf of its client, if the latter fails to make a payment or to carry out specific functions in terms of the commercial contract.
The guarantor’s commitment is legally independent of the underlying commercial contract.
A guarantee (bond or suretyship, as it is sometimes called) supports commercial contracts by providing trading partners with the flexibility to reduce credit and performance risk.
The guarantees are flexible and can be structured to cover a variety of needs
Below are descriptions of some of the most common types of guarantees.
Bid bond/tender guarantee
The purpose of these guarantees is to cover the risk that the company submitting a tender will not abide by its offer or deliver the required performance.
Secures the seller's/performers contractual obligations.
Advance payment guarantee
Issued when the buyer/manufacturer pays the contract price or part thereof in advance and requires security for a refund if the merchandise is not delivered, or if the delivery is not in accordance with the contract.
Covers the buyers after goods are delivered or work is completed during any agreed warranty period.
Retention money guarantee
Ensures that the correct repayments are made if the applicant fails to meet its contractual obligations during the warranty period.
Secures the applicant’s ability to fulfill its payment obligations to the beneficiary.
The guarantees described so far help to hedge the most common risks, but there are many other different risks, for instance, loan repayment risk, risk of late payment of rent, etc., for covering of which banks issue corresponding guarantees.