Do you want to participate in an international tender and need to provide a guarantee or bank guarantee? Are you an exporter and looking for an instrument to cover you against a possible non-payment from your foreign client? Through the international guarantees and guarantees, you can respond to different needs in your operations abroad.
International bank guarantees and guarantees are products issued by financial institutions (guarantors) at the request of their client companies, and by virtue of which the former respond to the commercial or financial commitments acquired by the latter in their international operations.
The guarantees are incorporated in the financial document or commercial effect used in these operations abroad while the guarantees are issued in separate documents.
In general, for the issuance of an endorsement or guarantee, the following information must be provided: intervening parties and the relationship between them, amount payable (maximum), documentation to be presented and language used, dates of issue and expiration of the transaction, terms of demanding payment, responsible for payment, and reference of the guarantee or counter-guarantee, among others.
Let us see what types of guarantees/guarantees exist and which are the most used in the international operations of companies, as well as the official support in this area, offered by the Official Credit Institute (ICO).
Depending on the responsibility of the bank issuing the guarantee/guarantee, we can distinguish between direct and indirect guarantee (counter-guarantee). In the first case, the bank issues the guarantee directly in favor of the beneficiary. Meanwhile, in the indirect guarantee, there is a countervailing bank, located in the market of the beneficiary, who acts as intermediary guarantees the guarantor bank. In some cases, the intervention of the counter-agent may be stipulated by the regulation of the market of destination and/or when the beneficiary is a public body.
On the other hand, in international trade, the use of guarantees at first demand is more frequent than of contractual guarantees. In the guarantees to the first require the payment derived from the execution of the guarantee takes place when the guaranteeing entity receives the corresponding request in writing and some document established in guarantee text; in addition, they are irrevocable and non-transferable guarantees, unless otherwise indicated at the time of issuance. Contractual guarantees, however, require proof of the originator’s default, providing documentary evidence (court judgments, arbitration awards, etc.) and are issued by insurers and other specialized entities.
Guarantees used in the international business
Among the guarantees and bank guarantees most frequently used by companies in the development of their international activity, we can cite the following, some of them directly related to the processes of public bidding and the contracting of works or the supply of capital goods:
- Tender guarantee. Intended to ensure that the exporting company will keep the bid submitted in a bidding process and, if it is awarded, will sign the corresponding contract based on the conditions established in the said bid. This type of guarantee is often required by tenderer to participate in public tenders or tenders. Likewise, it is usually issued with the undertaking of the company that, if it were successful, it will order the issuance of a guarantee of good performance (see below). The amount is equivalent to a certain percentage of the value of the offer presented by the exporter.
- Good performance guarantee. Its purpose is to guarantee the fulfillment of the obligations contracted by the exporter (compliance with deadlines, qualities, the scope of supplies, etc.) in a contract that has been generally awarded for the supply of certain capital goods or for the realization of a work/construction. Its cost is calculated by applying a percentage to the value of the project or object of contracting.
- Maintenance guarantee. It is intended to cover the foreign purchaser of possible defects in the work or the equipment purchased, as well as the breach of the maintenance contract by the exporter.
- Retention guarantee. Its use, more often in construction projects, involves the retention of a part of the contract amount as a guarantee against hidden defects. This is a guarantee intended to cover contractors against possible hidden defects in construction works or projects.
- Guarantee of refund or refund of advance. Its purpose is to respond to the repayment of an advance delivered by the importer when the exporter breaches its obligations (do not carry out the sale under the agreed conditions). The amount is equal to the value of the down payment.
- Letter of credit stand by. Its purpose is to satisfy (by the financial guarantor) the amount of an international sale to the exporter when the importer does not pay the payment. It would be a guarantee at first request, which can also be confirmed by a confirming bank located in the country of the exporter, especially when the guarantor bank (importer’s bank) is not a first-line entity or country risk is high.
International guarantees with ICO support
- The Official Credit Institute, in its work of financial support to Spanish companies that are internationalizing, has the ICO International Guarantees Program and the ICO International Guarantees Line, to facilitate companies access to international tenders and the award of projects outside of Spain.
- The ICO International Guarantees Program was designed for large companies that require the issuance of guarantees for amounts exceeding 10 million euros per project. The ICO is responsible for approving and issuing guarantees directly to foreign beneficiaries, assuming the risks of Spanish companies jointly with private financial institutions.
- The ICO Guarantees International Line has an endowment of up to 1 billion euros (until the end of 2015, or before, if these funds are exhausted) and is destined for smaller operations of Spanish companies (with a majority of capital social of Spanish origin), including its subsidiaries. The maximum amount of the guarantees charged to this line is 25 million euros per company (in one or several guarantees). In this case, it is the private financial entities that approve and issue the guarantees to the foreign beneficiaries, and ICO assumes the risk of the financial institution.
In both cases, international guarantees may be issued in foreign currency, in accordance with the requirements of the foreign beneficiary.
In conclusion, it should be noted that the use of bank guarantees and guarantees has gained weight in foreign trade operations, as an instrument that supports the demands and obligations of the parties. In this sense, exporters can become both beneficiaries of these guarantees, ensuring the collection of sales abroad through a letter of credit standing by; as in ordering parties, when the foreign counterpart requests the constitution of the guarantee to ensure that it complies (the exporter) with its contractual obligations. This last case is common in the processes of tendering and adjudication of contracts abroad, being also frequent that the same company requests the issuance of several guarantees, as part of the requirements imposed by the tenderer/beneficiary.