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Bank guarantees
Bank guarantees are issued in favour of the beneficiary according to the application of the ordering customer.
A guarantee entails the bank's irrevocable commitment to pay the beneficiary a sum of money, such that it does not exceed the sum indicated in the letter of guarantee, promptly after the beneficiary has submitted its claim in writing.
Guarantees are normally irrevocable, which means that they cannot be unilaterally revoked by the issuing bank. Annulment, as a rule, is possible only with the consent of the beneficiary.
Relevant costs are usually payable by the ordering customer. The bank issues and amends guarantees charging commission according to the current price list and a guarantee fee based on the evaluation of risks.
The ordering customer should take into account that guarantees are normally payable at the beneficiary’s first request. It is therefore recommendable to check your partner’s business background.
Sampo Pank offers the opportunity to apply also for foreign bank guarantees.
Guarantees may be divided as follows:
- Payment guarantees
- Bid/tender guarantees
- Advance payment guarantees
- Performance guarantees
- Warranty guarantees
1. In the case of payment guarantees, the buyer of goods or services transfers the money to the seller's bank according to the payment terms stipulated in the contract. If the payment terms are adhered to properly, the bank will not interfere in the process of effecting payments. If, however, the buyer fails to adhere to the payment terms, the bank will be obliged to pay the seller the amount owed by the buyer. For this purpose, the seller must submit to the bank a corresponding claim which indicates the amount of the claim and the nature of the liability.
2. Bid/tender guarantees oblige the bank to recuperate the loss inflicted on the buyer, when the latter accepts the terms of the seller but the seller fails to sign the contract, withdraws her offer, or cannot guarantee the fulfilment of the contract terms.
3. Advance payment guarantees are issued in favour of the buyer. The guarantee serves as security which the buyer may employ if the seller fails to meet the due terms stipulated in the contract, or is not capable of supplying the required commodities. In such case the buyer may claim from the bank the sum it has paid the seller as the down payment.
4. Performance guarantees serve as security which the buyer may employ if the seller fails to deliver the commodities duly. From the buyer's point of view, the performance guarantee is to some extent similar to the advance payment guarantee. The performance guarantee is different in that down payment in favour of the seller is not mandatory. The guarantee usually covers penalties arising from the failure to comply with the terms of the contract.
5. Warranty guarantees help the buyer when the purchased goods manifest defects during the warranty period, but the seller refuses to repair them or change the product. Such guarantees are used widely in construction services.
The list above is not complete. Guarantees may also mean obligations towards the Tax and Customs Board (customs guarantees), obligations from rent contracts (rent guarantees), obligations towards the payment of loans (credit guarantees), etc.
Application conditions
A prerequisite established by the bank for issuing a guarantee is the ordering customer’s credit eligibility and previous co-operation with AS Sampo Pank. In practice, the ordering customer must go through the normal loan application procedure, including the submission of required documents and conclusion of guarantee agreements.