International-bank-guarantees

Basic types of guarantees

Bank guarantee is a Bank's obligation to pay the beneficiary a certain amount in case one's counterparty (the principal under the guarantee) fails to fulfill one's contractual obligations.

A Payment Guarantee ensures timely payment to the supplier for the goods delivered or the work performed under a contract.
A Bid Bond ensures compliance of all tender participants with the tender conditions (issued for the tender authority).
A Performance Guarantee ensures compliance of the seller with obligations on delivery of goods or performance of work under a contract.

In which cases are guarantees used?

In terms of delivering goods and services, risks may appear at different stages varying from raw material acquisition, manufacture and storage of goods to timely delivery and provision of services and payment.

Use of bank guarantees in such situations allows for the protection of the interests of both the seller and buyer.International bank guarantees are used most frequently in the following cases:

Business partners have established a new, untried business relationship;
The seller is not confident as to the buyer's solvency, while the buyer is not confident as to the seller's capability to deliver goods/perform work/provide services;
The subject of the contract implies large-scale projects or tailor-made products;
In the event an international tender is organised.

Benefits from the use of bank guarantees

Possibility of guaranteeing fulfilment of obligations under a contract without prepayment;
Possibility of obtaining trade credit from the counterparty, the cost of which is lower than that of borrowing funds;
Reimbursement pursuant to a written payment demand only for the actual goods delivered;
Possibility of deferring payment for supply of goods or services under a contract.

Why are guarantees issued by PrivatBank beneficial?

20 years of experience in the international market.
Availability of correspondent banks worldwide.
Promptness of guarantee issuance: a covered guarantee (secured by cash funds) is issued within one day without need for a contract.
Low fees and charges.
Individual approach in terms of drawing up guarantee taking the nature of your business into account.

For issuing a guarantee you need to take just 2 steps:

Step 1. File the signed application for guarantee issuance with a financial manager and transfer cash cover under the guarantee to the account specified by the manager (in the event the guarantee is issued against cash cover).

Step 2. Provide the bank with three types of documents: the constituent documents, financial statements and documents certifying the title to property which may serve as collateral (unless the guarantee is issued against cash cover).

For advice on international documentary instruments consult with the Head Office experts by emailing: trade.finance@privatbank.ua

Fees and charges for bank guarantees and standby letters of credit

Guarantees and standby letters of credit issued by the Bank

Guarantees and standby letters of credit advised by the Bank

Service	Fee
Issuance or amount increase of guarantee / standby letter of credit	0,3% (min 100 USD, max 1500 USD)
Obligation fee under an uncovered transaction	min 2% per annum — covered by the pledge of rights on deposit, domestic government bonds or covered by counter-guarantees of other banks; min 3% per annum — covered by the pledge of property or real estate; min 3.5% per annum covered by other kind of pledge or uncovered. (min USD 20 per month)
Sending of payment documents between banks	Calculated as per fees of the courier service
Amendment	50 USD

Service	Fee
Advising or authenticity request of guarantee, standby letter of credit / amount increase advising	0,15% (min 100 USD, max 500 USD)
Sending of payment documents between banks	Calculated as per fees of the courier service
Advising of amendment	50 USD

Frequently Asked Questions

What is a bank guarantee used for?

A bank guarantee is one of the forms of collateral, which can be demanded by the buyers and/or persons involved in the transactions with foreign partners. This document confirms the bank’s commitment to pay specified amount to a person who organized bids or the transaction, even if the debtor is not able to fulfill his/her obligations for any reason. By providing a bank guarantee, the company thereby confirms the seriousness of its intentions under the contract.

When and in whose favor is a counter-guarantee issued?

A counter-guarantee means the counteragent bank’s commitment issued to a guarantying bank to reimburse for any amounts paid out by the latter under the guarantee in favor of the beneficiary.

What is a standby letter of credit?

A standby letter of credit is actually a bank guarantee issued in the form of a letter of credit. It is the bank’s commitment to pay the guaranteed amount to the beneficiary under the letter of credit in case of a guarantee event (i.e. failure of an applicant of standby letter of credit to fulfill obligations towards the beneficiary). If, in the opinion of the beneficiary, his/her partner has violated obligations, he/she may use a standby letter of credit. As a rule, it is sufficient to provide a simple written application to the bank that the partner did not fulfill assumed obligations (often along with other documents during the term of the letter of credit and on specified terms). In case of fulfillment of obligations by the partner – the applicant of the letter of credit – the letter of credit shall lose its validity upon expiry.

What is advising?

Advising implies sending an official notification letter to another party to the letter of credit deal regarding performance of a certain operation (issue, amending, cancellation, etc.).

What is a 'obligation fee'?

This implies a fee charged as remuneration to the bank for the risk and obligation provided (i.e. obligation to pay under the guarantee) with the obligation not covered by the customer's financial funds. As a rule, this fee is expressed in percent per annum.