These are written undertakings by an institution on behalf of a party for payment on presentation of a written demand, stating that the party has defaulted in terms of their contract.
Guarantees are used to back up performance by an exporter or a contractor. There are many types of guarantees that fulfill different functions.
You should have total trust that the beneficiary will not make abusive demands.
These are high risk instruments for the applicant as payment takes place on pure demand and no proof of default is required.
If you are the beneficiary, then the only risk you have is the ability of the issuing bank to pay, and if it is a cross-border guarantee, also the country risk of the issuing bank.
How guarantees can benefit your business.
Provide security for performance
Give assurance of the serious intent and business standing of the party whose obligations are underwritten
What it costs
Determine your fee
The main cost under a guarantee is the establishment fee, which is usually charged for every 6 months or part thereof.
It is standard international practice for the applicant party to pay all the costs. So if another cross-border bank is involved, then the applicant party also pays the other bank's costs.
Guarantees are expensive instruments, mainly due to the high risk factor attached to it by the financial authorities.
There will also be amendment costs, if applicable.
Helpful banking tools
Standard with your account
Getting it made easy
If you are the applicant party, your business would need a credit facility with the bank.
The beneficiary of a guarantee needs no credit limit
If your business does not already enjoy credit facilities with the bank, you need to approach your Relationship Manager for a limit to be marked. You also need to complete an application form and provide the proposed wording of the guarantee to the bank for approval.
If it is the first time that you want to issue a guarantee, you need to complete a General Indemnity for Guarantees; this indemnity will cover all guarantees to be issued by the bank on behalf of your business.
First National Bank - a division of FirstRand Bank Limited. An Authorised Financial Services and Credit Provider 1929/001225/06 (NCRCP20).