What Is The Bank Guarantee (BG)?

A bank guarantee (BG) is a document through which a bank acquires a commitment to meet a customer's payment obligation, as long as the latter fails to comply with it. Basically, this client's bank becomes his guarantor for that specific operation and will be in charge of making the payment if his client does not fulfill his obligation within the established term.

Three people participate in this operation: the bank or guarantor, in charge of supporting the operation, being the guarantor of bank guarantee (BG), the bank's client, the one who has contracted the debt, and the beneficiary of the same, that is, the person or entity that will receive the amount of the customer's payment obligation.

How bank guarantee (BG) works?

Now that we have seen what the bank guarantee is and what types are currently applied, it is normal for us to ask ourselves what is the benefit that entities can obtain by acting as guarantors in the operations of their clients with stand by letter of credit. After all, when a person or company signs as guarantor, they always run the risk of having to face a payment obligation that they have not contracted on their own, which can be a problem and generate conflicts between the entity and the client.

For this reason, banks receive commissions for acting as guarantors of their clients, something completely reasonable given the risk that these companies assume when signing a bank guarantee by providing a stand by letter of credit. These types of commissions are varied and depend on different factors: the duration of the contract, the nature of the guarantee (defined or indefinite), the term, the risk assumed, and the interest rate.

In the real estate market, it is common for owners to request the stand by letter of credit of at least several of the months of the mortgage from their tenants. This happens to the landlord because he will never be totally sure that the tenant pays all the installments in their installments, and the guarantee serves as a guarantee in cases of non-payment since the bank will respond to the default of the tenants.

In most cases, the guarantor of a loan is usually a relative, friend, or partner of the debtor, who undertakes to respond to the payment in the event that the guarantor defaults on his obligations. However, in other scenarios such as mortgage rentals, banks also act as guarantors for their clients, signing a document called a bank guarantee (BG).