Bank Guarantee: What to Know Before Signing a Bank Guarantee

A bank guarantee is a contract of guarantee where the guarantor ensures to the beneficiary the payment of the debtor’s debts in case the latter is unable or unqualified to settle what is due.

But what should you know before signing a bank guarantee? What evaluations should be made if you are a contractor (debtor), guarantor, or beneficiary? Let’s find out together, let’s see how the bank guarantee works depending on the role the person has in the guarantee contract.

The Contractor’s Perspective

The contractor is a subject (individual or legal entity) who does not offer sufficient guarantees and needs someone to vouch for them to make a purchase or offer a service, in case they are unable to autonomously meet their obligations.

Firstly, it’s important to remember that strictly legally, the debtor is not an active part of the contract; the two parties involved in the signing of the guarantee are the guarantor and the beneficiary.

Consider two examples, among the most common yet profoundly different: the contractor could be a self-employed worker wanting a mortgage, or a company seeking to assure a public entity of covering the services it will offer if it wins a tender.

In the first case, the contractor must turn to a guarantor with solid assets, often a parent acting as guarantor for the bank issuing the mortgage. Here the guarantor is an individual. In such cases, the beneficiary is almost always a bank: the guarantor will have part or all of their assets frozen as a guarantee for the bank issuing the mortgage or loan.

In the second case, the company or firm seeking a surety bond to participate in a public tender will likely turn to a bank or more often an insurance agency. In this case, the guarantor would be a credit institution.

The payment for the service must also be considered. Banks and insurance agencies (differently from each other) request payment for their guarantee services and evaluate your solidity to understand the risk of the operation.

The guarantor is not a benefactor; once they have provided what is requested, they will recover the capital from the debtor.

The contract could also be terminated due to the debtor’s breaches towards the guarantor. For example, if your guarantor is an insurance agency, asking for a cash “premium” for the guarantee service, they may fail to meet their obligations if the debtor does not pay the agreed amount.

The contractor must therefore carefully analyze their situation to choose the most suitable guarantor for their needs.

The Guarantor’s Perspective

The guarantor is the guarantor of the bank guarantee contract. That is, the party guaranteeing payments to the beneficiary when the debtor has difficulty settling what is due. The guarantor can also ensure the correct execution of a service, as in the previous example of the company wanting to participate in the public tender.

When a bank is the beneficiary of a contract, it will assess the economic solidity of the guarantor; if an individual, real estate assets, especially in addition to a primary residence, are seen very positively.

Income and monthly earnings will also be examined. If the guarantor can meet the debtor’s payments month by month, the bank will feel almost 100% protected from possible insolvencies.

For these reasons, a guarantor already engaged in one contract will be less appealing for a second one. Returning to the mortgage example, a family father who has already committed his house for the first child, wanting to be a guarantor for the second child, will have little to offer. The bank is unlikely to accept him as a guarantor.

The forms of commitment for the guarantor can vary, the main bank guarantees are:

Omnibus guarantee: the guarantor commits to settle all present and future debts of the debtor, a maximum limit must be agreed upon.

Joint guarantee: the guarantor commits to pay up to the entire amount of the original debt agreed upon.

Guarantee with benefit of excussion: the guarantor commits to pay the remaining sum after the excussion of the guaranteed debtor. The beneficiary will obtain the remaining amount from the guarantor.

Pro-rata guarantee: the debt is divided among several guarantors; if one defaults, the others must also divide the missing part.

The guarantee can also be rescinded. The guarantor is committed to the contract for the entire duration of the guarantee; however, as in the example of the omnibus bank guarantee, the guarantor can consider themselves released from the contract by sending a registered letter to the bank.

From that moment on, depending on the debtor’s economic strength, the bank will decide whether to cancel or maintain the loan granted to the debtor. However, the guarantor is not entirely safe. They must still settle all of the debtor’s debts up to the date of the letter’s receipt. The guarantor is excluded only for debts incurred subsequently.

In some cases, the guarantor may be contacted directly, without first consulting the debtor, especially if the latter is known as a bad payer.

Therefore, the rule remains to think carefully before accepting certain clauses and to consider the amount for which to commit oneself.

The Beneficiary’s Perspective

The beneficiary is the party that receives the guarantee. Usually, it’s a bank, an entity, and rarely an individual.

The beneficiary wants to ensure that a certain service is performed. For example, entities that tender public contracts want assurance from the winning company that certain works will be carried out as agreed.

In other cases, the beneficiary wants to ensure that they receive the guaranteed loan and the due interests. For example, a bank that disburses a sum of money as a loan.

The beneficiary is the party in the guarantee contract that holds the upper hand, the one who will have their credit returned in any case, provided they pay due attention!

Translation of the requested text: For example, a landlord (beneficiary) who asks a tenant (contractor) for a guarantee as a form of security for the payment of monthly rents should know that if the potential tenant proposes an insurance agency as their guarantor, the contract might not be the most secure.

Indeed, as previously explained, the failure to pay the cash “premium” to the insurance agency means releasing the latter from contractual obligations, leaving the landlord without guarantees.