A bank guarantee is a guarantee given by the bank on behalf of the applicant to cover a payment obligation to a third party. In other words, the bank becomes a guarantor and is answerable for the person requesting the guarantee in the event that they are unable to make the payment they have agreed with a third party.
What are the requirements for obtaining a bank guarantee?
By offering a guarantee, the bank becomes responsible for a possible future debt of the applicant and therefore runs a risk, in the same way as for loans. The bank does not have to release the money at the time (and will most likely never have to do so), but it will still impose a number of conditions that are usually the same as for any other asset transaction.
Bank guarantees, for individuals, are mainly used as a guarantee for rental contracts. The person requesting the guarantee must be a customer of the bank, which will assess their level of solvency and payment performance and check the funds available to them. If everything is in order there is a good chance that it will provide a guarantee for the amount requested. For this, the person asking for the guarantee must provide the specific details of the property they wish to rent, the owner and the amount requested in the guarantee.
Duration and term of a bank guarantee
The bank guarantee can have an indefinite term, i.e. with no expiry date, or, alternatively, a specific end date. The amount of the guarantee will be established, in the case of a property rental, by the number of monthly payments requested by the landlord. Once the transaction has been approved, the bank will issue the bank guarantee document to the applicant who, in turn, will give a copy to his or her landlord. The issuing of the guarantee requires the customer to pay a number of fees, such as for the study, formalisation and monthly fees.
Within the established period of time, and when the applicant does not comply with what was agreed in his or her rental contract, the landlord may ask the bank for the unpaid monthly payments. In order to do this, they must also prove non-payment of these monthly payments. Once the monthly payments have been made, the Bank can claim them back from the applicant.
If the term of the guarantee expires without any incidence the bank itself will close the guarantee and terminate the agreement. The customer receiving the guarantee must return the physical guarantee in order to cancel it properly.