How to Apply for a Bank Guarantee: Step-by-Step Process

Want to apply for a bank guarantee but unsure of how to start? You are not alone. Whether you are a business owner or want financial backing as an individual, comprehending the bank guarantee process helps you save time, money, and hassle.

In this blog, we will outline how to apply, walk through the documents required to support the application, and let you know what mistakes to avoid when approaching your bank, helping to make the application process clear and simple.

Who Needs a Bank Guarantee?

Businesses that often require bank guarantees include:

Contractors submitting bids for government contracts
Entities dealing in import/export in international trade
Companies obtaining large contracts with vendors
Small/medium enterprises obtaining trade credits

Step-by-Step Guide to Getting a Bank Guarantee

Step 1: Know What Type of Guarantee You Need

Before you approach the bank, know the nature and purpose of the guarantee. Read the contract or terms of the tender first to confirm whether it is a performance guarantee, a financial guarantee or a bid bond guarantee.

Pro tip: Talk to your legal / finance team to be certain you can meet the beneficiary’s expectations.

Step 2: Choose a Bank

Not all banks provide bank guarantees and can have different rates, fees, and processes. Choose the bank which has a good reputation and great business relationship. Banks are more favourable to companies with an existing account and credit history.

Step 3: Documents Checklist

Each bank will operate differently, but generally, the following documents will always be required:

Completed the bank guarantee application form with the bank
Request letter clearly stating the guarantee type, value and beneficiary
Copy of the underlying contract or agreement
Board resolution (Company)
KYC documents (PAN, GST, incorporation certificate, etc).
Audited financial statements or proof of income.
Documentation for collateral/security (if required).

Step 4: Submit the Application to the Bank

When you are ready with all of the documents, you need to apply to your relationship manager or the bank’s trade finance department. Make sure all the information is correct, particularly the beneficiary’s name, guarantee amount, and validity.

Step 5: Bank Reviews and Approves the Application

The bank will review your financial status, previous transactions, credit rating, and risk of the guarantee. This will include:

credit appraisal (especially if the guarantee amount is larger)
An internal approval by the credit or risk departments
a legal review of the guarantee terms

Depending on the amount of the guarantee and your risk profile, this may take a few additional days up to several weeks.

Step 6: Provide Collateral or Margin (If Required)

Based on the review, the bank may require:

Cash margin
Lien on a fixed deposit
Collateral on a property
Using an existing credit limit amount (if available)

Once the collateral has been established and the documentation is confirmed, the bank will then proceed to the point of issuing the guarantee.

Step 7: Issuing of the Bank Guarantee

Once the bank has the approvals and collateral security, it will issue the guarantee document. The guarantee document is typically addressed to the beneficiary and will include:

Guarantee number
Guaranteed amount
Validity of the guarantee
Conditions under which payment will be made
Details of the applicant and beneficiary

Either you (the applicant) or the beneficiary will receive the original guarantee letter, in either hard copy form or sent via SWIFT for international deals.

Step 8: Notify the Beneficiary

Once the bank guarantee has been issued, you should notify the beneficiary as soon as possible. Send them the original copy of the guarantee and check that all the terms agree with the terms of the agreement. Make sure to follow up promptly if the beneficiary wishes to make amendments or seek clarification.

Step 9: Track and Renew (If Needed)

Keep track of when your bank guarantee expires. If your project goes beyond the date of expiry, you need to request a renewal of the bank guarantee 2 or 3 weeks in advance of the expiry date. If you do not renew in time, this can lead to defaults, disputes, etc.

Common mistakes to avoid while applying for a bank guarantee

Mistakenly entering the incorrect beneficiary name can make the guarantee null and void.
Not realising the validity and claim periods can lead to unintended and avoidable defaults.
Not collecting the original guarantee or release letter can create delays in closure and the return of collateral.
Missing bank fees, commissions, and renewals can impact your cash flow.
Not renewing or extending the guarantee expiry date can lead to breaches of contract.

How Pacific Corp Can Help You Secure a Bank Guarantee?

Pacific Corp aims to make the process of obtaining a bank guarantee as simple as possible for all companies and individuals. With many years of trade finance experience and a great reputation, we offer you bespoke advice, quick and easy processing, and expert support to ensure the bank guarantee meets your needs exactly.

Whether you are engaging in a domestic agreement or negotiating an international trade deal in the meantime, Pacific Corp provides trusted and timely bank guarantee services, so your financial transactions are protected. Contact our team today and secure every deal you make with confidence.

FAQs

1. What is the purpose of a bank guarantee?

A bank guarantee helps protect against the financial risk of a loss caused by one of the parties’ defaulting on their contractual obligation.

2. How long does it take to get a bank guarantee?

Typically, it takes around 3 – 7 working days to obtain a bank guarantee. The timeline will depend on the required document and bank processes.

3. Can individuals apply for a bank guarantee or only businesses?

Both individuals and businesses can apply, depending on the nature of the transaction.