Types of Guarantees/Bank Guarantees

A Bank/Demand guarantee is an irrevocable undertaking issued by the Guarantor/Bank to pay beneficiary in its currency for the maximum amount of the guarantee, upon presentation of the complied demand in documentary form.

A demand/bank guarantee must be in writing, either in paper form or in digital form. If it is in paper form, it must be signed and if in electronic form, the identity of the issuer must be authenticated. SWIFT messages are usually used for demand guarantees because they are authenticated. A pdf copy of a demand guarantee may not be enough without a signed and original document.




Types of Guarantees/Bank Guarantees

Usually guarantees are subject to URDG-745, there are various types of demand guarantee, but usually they can be divided into two categories. The first one is payment guarantees which cover the risk of a default in payment by the applicant and second is performance guarantees which cover the risk of applicant fails to perform the underlying contract with the beneficiary, let us have a look on different types of guarantees:

  • Payment guarantees: Cover the risk of default in payment, for example if buyer does not pay the supplier for delivery of the goods.

  • Advance payment guarantees: Cover the risk of advance payment made, for example in the event of Non‑fulfilment of the contract, supplier does not pay back to the buyer advance payment already made by buyer.

  • Financial Guarantees: These guarantees can be used to safeguard the obligations of one party that may be called upon to make a payment as per underlying agreement. This avoids requirement for payer to deposit funds at the outset of the transaction.

  • Performance guarantees: Cover the risk of performance, for an example contractor breaches the terms of any construction contract.

  • Retention money guarantees: Allow the release of the full price to the applicant upon supplies, fulfilment of a contract, upon delivery of the goods or completion of the project. Usually a certain part of the contracted amount are retained as security for potential failure of done work or as warranties given in the contract, for that an applicant provides a guarantee to release at the completion of the work itself called as retention money guarantee.

  • Warranty Guarantees: Cover the risk of a breach of warranty for goods, works or services provided by an applicant. A warranty guarantee covers mostly same obligation as a retention money guarantee, but both work in different ways. The value of a retention money guarantee is part of the contract which need to be repaid to the customer if there is a default by the contractor on warranties. The value of a this type of guarantee is an approximate of the compensation required by the customer in case there is a default by the contractor the full price is payable.

  • Customs guarantees: These are issued to customs department to cover duty or liability that may become payable when goods or equipment imported into a country on a temporary basis are not re‑exported within an agreed time period. For an example, Party A sells TV to Party B in neighboring country by assuring them via contract or other mode that in case of mechanical requirement for certain period I will be responsible to    repair, in such a scenario B may send back to country a for repair work which won’t be actual    import for Party A and must be re-exported, however, custom may treat this as an actual import    for party A without a customs guarantees.

  • Direct Guarantee/Bank Guarantee: If directly issued on behalf of the applicant to beneficiary without any involvement of other bank to counter take.

  • Indirect Guarantee /Counter Guarantees: Counter guarantees are types of guarantees where in usually one party issues a local guarantee in favour of beneficiary back of counter guarantees, for an example, Party B (beneficiary) located in USA and wants a guarantee by one of the local bank, in that case Party A (applicant) may arrange to issue a counter guarantee in favour of one of the USA bank and request to issue the local guarantee to the beneficiary, it is an extra layer of protection to avoid country risk of the applicant.

  • Tender Guarantees or Bid Bond Guarantees: Cover the risk of failure by a successful bidder to conclude/take up a contract. A bidder may not withdraw its bid before beneficiary/customer awards, and it also safeguard the bidder in case if awarded the contract, from refusing to sign and take up further the contract according to the terms proposed by the beneficiary.

  • Court or Arbitration Guarantees:  Cover the liability of a party to a legal dispute to pay the other party’s sum of amount due under a judgment or award.

  • Parent Company/Instructing Party/Third Party Guarantees: These may be issued behalf of a parent company to cover either the performance or the payment obligations of its subsidiary, JV or affiliated companies. For an example Party A is a well-known company and partnered with Party B, in this case “A” may request the bank to issue the guarantee on behalf of “A” using his facilities/limit having applicant as “B” in favour of beneficiary.

  • Direct Payment Guarantees: These kind of guarantees are primary means of payment and may or may not be linked to a default in performance or payment, this may be called as unconditional guarantees as well.

  • Suretyship guarantee/Accessory guarantee:  This type of guarantee creates a secondary liability on the part of the guarantor. The guarantor is only obliged to pay if the party on whose behalf the guarantee was issued is actually in default

Key Points:

-A guarantee may be issued by anyone including an individual.

-A guarantee/bank guarantee may be subject to URDG-745, local law or no rule as well, and there is no concept of confirmation likewise letter of credit, moreover a counter guarantee may be issued to cover the almost similar risks. 

-A guarantee/bank guarantee may only be honour upon complying presented and written demand if subject to URDG-745.

-A guarantee/bank guarantee always work in case of non-performance wherein a letter of credit is a vice versa instrument and paid upon complied presentation on performance basis.

-Guarantee is subject to law of the place of issuance if silent about the law and jurisdiction.

-There may be various other types of guarantees such as credit card, foreign airlines/IATA or commodity hedging etc.

-An MT760 usually used for an issuance and MT767 for amendment of a guarantee/bank guarantee via swift mechanism.

-A bank guarantee should always contain a law and jurisdiction clause in order to avoid/resolve disputes.



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Chandan Kumar Yadav
My name is Chandan Kumar Yadav CDCS, CSDG, CITF, PGDIBO,AML-KYC, CCFE, MLIBF, CSF, 6SIGMA a trade finance professional with an experience of 11 years whereas worked with several stages of letter of credit, bank guarantee and on other payments methods of trade transactions such as documentary collection, open accounts, SBLC etc., I have a fair understanding of Trade Based Money Laundering as well, Blogging related to Trade Finance is my passion and I want to share which I know and learn from others, I have worked with Wells Fargo, Yes Bank Limited and Bank of America, India which helped me to gain knowledge, view of Trade Finance and importance of International Trade in world's economy. Trade Finance is thumping product, everyday we are learning something new so in order to keep learning I started this as one of the platform. . Let's Learn Together

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