Bank Guarantee Financing

Financing against a bank guarantee sees a financial institution commit to paying a defined amount if a party you are entering into a contract with does not meet their contracted commitments or if you do not meet your obligations to the other party. This might be a service that a business will provide your company, purchase of goods or stock, high-value equipment or machinery acquisition, the payment of a liability, and so on. The lending institution (usually a bank) will cover the cost if your contractor doesn't meet their commitments and will promise to do the same if you can't pay for the service or goods. 

Bank guarantee financing is especially useful if you work with international suppliers of goods, equipment, machinery and stock – mainly if these are high-value contracts. In these deals, there is a natural risk for both parties, primarily if you haven't worked together before or when the contracting parties are in different countries where it is challenging and costly to pursue legal recourse if something goes wrong. You want to ensure that your supplier fulfils their contractual obligations, you get your order on time, as specified, and with the quality promised. At the same time, your supplier wants to ensure that you pay on time and have the funds available to meet the payment schedule. 

Here, the bank will guarantee to cover any losses linked to the contract if you or your supplier can't meet their side of the agreement. For your suppliers, it will allow them to deliver goods or services safe in the knowledge that the guaranteeing bank will repay their liability if you cannot repay the amount you owe on time. 

Everyone needs to look out for their interests when working with international suppliers. This is a normal part of doing business, but it can result in a stalemate, where buyers and suppliers don't have enough confidence to work together, knowing the other will meet their contracted obligations. This uncertainty can also act as a barrier to entry for smaller businesses. Key suppliers may not want to supply you with goods, machinery or equipment based on concerns about your ability to pay for what they have provided.  

In this respect, bank guarantee financing has several advantages:

Reduce risk for your creditor

Your business can use bank guarantees to evidence if you could not repay the creditor for any reason, your bank will cover any outstanding cost to the supplier. This safeguards their investment and bypasses the need for expensive and lengthy legal battles or trying to recoup the money you owe. 

Underlines your ability to meet the repayment schedule

High-value investments in goods, machinery, equipment or stock that will take some time to deliver usually come with staggered payment plans. This is advantageous to you as your business doesn't need to pay the total amount in a single go, and you can accrue funds. However, your creditor has to rely on the fact that you will not go out of business, experience a dip in revenue, don't default on other debt and have accrued funds properly before you pay subsequent or final instalments. Bank guarantee financing assures the counterparty they will be paid for delivering goods, no matter what happens to your business. 

Provides comfort to both businesses involved in the deal

Bank guarantee financing provides comfort in cases where a buyer and supplier have no previous experience working together and are unsure of each other's ability to supply and finance contracted obligations.

Underlines your creditworthiness

Financial institutions will only provide bank guarantee financing when they understand your business's financial position, creditworthiness and projected income. If they are happy with what they see, they will offer a guarantee, providing comfort to the party you are entering into a contract with. In other words, the bank is effectively backing the deal and showing they have confidence in your ability to meet your financial obligations. 

Businesses of all sizes can access bank guarantee financing. However, it is advantageous to small and medium enterprises as a stepping stone to growth and their ability to enter into contracts they wouldn't be able to in any other way. They can secure contracts without putting all the funds forward for the purchase, which can open them up to risk if the counterparty doesn't meet their commitments.

This type of financing is essentially a way for lenders to back your creditworthiness. For this reason, your credit score, financials, trading history, future growth and plans for the goods or services you will receive must all support your company's future success and growth. As long as you can prove these things, a lender will be able to offer you bank guarantee financing.

As well as meeting the guarantor's other criteria, bank guarantee finance usually needs some form of security. What this is, depends on what your business has to put forward as collateral – there is no one-size-fits-all here. Sometimes it will be real estate; in other cases, you will need to give the lender cash as a deposit for the guarantee. In other cases, you will have business assets (such as machinery, stock, equipment and other tangible resources) that the lender can use as security. The amount you want the lender to guarantee will impact the value of the assets or capital the lender will want to use as security.