Bank Guarantee Issuance Guide and flow
The Lifecycle of a Bank Guarantee
A visual guide to the issuance process of Demand Guarantees and Standby Letters of Credit, governed by rules like URDG 758 & ISP98.
1. Understanding the Instrument
Demand Guarantee
An irrevocable promise by a bank (Guarantor) to pay a Beneficiary a specific sum upon receiving a written demand that complies with the guarantee's terms. It's independent of the main contract.
Standby Letter of Credit (SBLC)
A bank's commitment to pay a Beneficiary if its customer (the Applicant) fails to perform a contractual obligation. It serves as a "standby" safety net for payment or performance.
2. The 5-Step Issuance Process
Step 1: Initiation - The Application
The process begins when the Applicant (or Principal) asks their bank (the Guarantor) to issue a guarantee for a Beneficiary.
- Names of all parties involved.
- Reference to the underlying contract.
- Maximum payable amount and currency.
- Expiry date or event.
- Terms for demanding payment.
Step 2: Guarantor's Internal Review
The bank conducts due diligence and credit checks on the Applicant. This is vital as the guarantee is an irrevocable, independent promise to pay, creating a financial risk for the bank.
If the bank can't issue the guarantee, it must inform the instructing party "without delay" to maintain transparency (URDG 758 Art. 9).
Step 3: Issuance & Effectiveness
A guarantee is "issued" when it leaves the Guarantor's control, making it irrevocable.
- Paper: Issued when sent via an independent carrier (post/courier).
- Electronic (SWIFT): Issued at the moment of transmission.
Conditional Effectiveness: A guarantee can be issued but not "effective" until a condition is met (e.g., beneficiary makes an advance payment). This must be verifiable through documents.
Step 4: Advising the Guarantee
In international trade, an Advising Bank (often local to the beneficiary) may be used to authenticate the guarantee.
Key Role: The advising bank confirms the guarantee's authenticity but takes on no payment obligation itself.
Step 5: Beneficiary's Review
Upon receipt, the Beneficiary should review the terms to ensure they are correct and provide adequate security. While the guarantor is already bound, the beneficiary can reject a non-compliant guarantee and request a new one.
3. Key Practices & Considerations
Clear Drafting
Poorly written guarantees are a major source of disputes. Using standard rules like URDG 758 helps create clear, concise terms and reduces ambiguity.
Direct vs. Indirect
Direct: Guarantor issues directly to Beneficiary.
Indirect: Applicant's bank issues a counter-guarantee to a local bank, which then issues the final guarantee.
Non-Bank Guarantors
While usually issued by banks, guarantees can sometimes be issued by other entities like parent companies, though local laws may apply.
Charges
The Applicant is typically responsible for bank charges. A guarantee's effectiveness cannot be conditional on the payment of these charges.
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