Updated last 26.03.2021
What is a bank guarantee?
The definition could be considered within two meanings:
When you apply for a loan most banks require a guarantee that you will repay the loan regardless of the financial welfare of your company. In this case you provide to the bank a collateral that you will repay your debt (which in the practice is perceived as a guarantee), in most cases in the form of mortgage on real estate or pledge of the tangible or financial assets which is subject to your transactions.
In addition to their role as creditor banks may play the role of a guarantor as to the reliability and solvency of the participants in various types of commercial transactions, tenders, competitions and public procurement. They play this role by providing you with the “bank guarantee” service against consideration. This means, that unlike the collateral on a loan, upon occurrence of specific conditions, whereby you fail to provide the goods or services, you have agreed to with the third party, the bank will pay instead of you a specific amount stated in the bank guarantee. By virtue of the bank guarantee the bank undertakes in writing to pay a specific amount as per the terms stated in the guarantee to the party stated therein (art. 442, Commerce Act). Precisely with this meaning of the definition bank guarantee are the provided explanations hereinbelow.
Unlike loans bank guarantees are issued usually faster, at lower fee and commission costs that you have to pay for the respective service.
What are the types of bank guarantees?
Bank guarantees may be part of the arrangements under various types of commercial deals, including tenders, competitions, and public procurement and may be required at any stage of the transaction. The main types of guarantees are:
In this case the bank, in its role as a guarantor on one hand, provides security to the buyer that certain goods will be manufactured under specific terms and conditions. And on the other hand the producer of the goods will receive payment once the terms and conditions are met and once the producer presents documents proving that. The buyer and the producer agree the terms and conditions under which payment will be made, and then the buyer deposits the money to the guarantor bank, which in turn is obliged to make payment to the producer once the agreed terms and conditions are met.
|Advance payment refund guarantee|
It is used in case of commercial deals where the buyer makes an advance payment to a supplier before the fulfilment of all terms and conditions of the trade contract. If subsequently the supplier fails to deliver the goods, render the service or fails to fulfil other terms and conditions underlying the contract, the bank is obliged to refund the advance payment to the buyer.
|Guarantee to participate in tender, competition or public procurement|
It is often the case that Small and medium-sized enterprises (SME) provide bank guarantees to participate in tenders, competitions, and public procurement. In this case the bank guarantee is the tool used to certify that your intention to participate in the procedure are serious, i.e. that you are not going to withdraw your proposal, if you win the tender/ competition/ procurement and / or you will not refuse to sign the contract awarded.
|Important to know|
|The general requirements for the provision of performance guarantees for public procurement are set out in the Public Procurement Act (PPA). According to amendments in the PPA in effect as of 1 March 2019, contracting authorities must indicate the envisaged performance guarantees and their percentage in the announcement of the call for proposals, in the call for interest, in the invitation to participate in negotiations or in the public procurement announcement. The law sets out the public procurement performance guarantee – it may not exceed 5 percent of the price of the public procurement contract. The guarantee that secures the funds paid in advance may be up to that amount and is released within 3 days after the repayment or utilisation of the advance payment. The guarantee could be provided on behalf of the contractor by a third party – guarantor.|
|Good performance guarantee|
In the contract that you sign with the third party there may be a requirement to have a guarantee that you will perform your obligations under the transaction in accordance with the agreed terms and conditions. If that does not happen, the bank pays the amount set out in the good performance guarantee.
Except the above stated guarantees, in view of the particular situation and the client’s specific needs, other guarantees could also be issued: guarantee for performance of warranty obligations, guarantees for customs’ purposes, etc.
What is the procedure and conditions for the issuance of bank guarantees?
In order to have bank guarantee, you have to file an application to the respective bank which would play the role of your guarantor. Each bank sets the content of the bank guarantee application. Once your application is approved a bank guarantee agreement is signed.
Banks provide bank guarantees by blocking cash on your account with the respective bank or against approved credit limits. If the guaranteed amount is big, the bank may require collateral for the guarantee in the form of a mortgage or pledge in its favour, for example.
|Additional informatio |
The specific terms and conditions for the issuance of a bank guarantee are available on the websites of the licensed banks and branches of foreign banks in the Republic of Bulgaria. The cost of the service for the issuance or change in a bank guarantee you may find in the fees and commission tariffs of the bank for legal entities and sole proprietors.