Peace of mind with bank demand guarantees

Anton Smit, executive officer for credit at Bank Windhoek, sheds light on bank demand guarantees.

31 January 2018 | Banking

The reality is that losing money can cripple a thriving business, or worse, force its closure. – Anton Smit, Executive officer for credit: Bank Windhoek

Daily, businesses in Namibia and around the world enter into agreements for the sale or procurement of goods or services.

With it, comes the accompanying risk of losing money from services or goods not delivered. The reality is that losing money can cripple a thriving business, or worse, force its closure.

To make matters worse, it takes time, effort and money to try and recover losses through litigation which may not be successful. So how does one deal with this very real threat? One solution to buffering such a potential risk is obtaining a demand guarantee from Bank Windhoek, which provides contracting parties with peace of mind.

This is how demand guarantee works: A client will approach Bank Windhoek and provide details of the contract that has been entered into with the beneficiary of the service. The bank will then issue a demand guarantee to the client’s’ named beneficiary; the client’s contractor or supplier. In the event of the bank’s client defaulting under the contractual agreement with the beneficiary, the beneficiary will simply submit a written demand to the bank in order to receive payment.

A guarantee is independent of the underlying contractual relationship, and the bank is in no way concerned with or bound the relationship in any way. What this means is that the bank is obliged to honour claims made by the beneficiary, despite any contrary claims or defences arising from the bank’s client.

Listed below are some of the seven commonly used types of demand guarantees: Tender guarantee/bid bond: This guarantee secures a client’s tender commitment. It pays out on demand by a beneficiary should a client default on the tender submission requirements.

Performance guarantee: Secures a client’s contractual commitments and pays out on demand by a beneficiary when client defaults on the terms of the contract. A prerequisite in terms of the Procurement Act, is an example for both the tender and performance guarantee functions.

Retention guarantee: Mostly implemented in construction projects. A beneficiary can demand payment when client does not rectify faults identified during the warranty period.

Credit facility guarantee: Used to secure a facility granted by a creditor - pays out when client does not honour payments of the facility. For instance, your company extends “unsecured” credit terms to a client and they fail to pay. Small, medium and large retail and commercial business, regularly make use of this form of guarantee.

Payment guarantee: Its purpose is to secure payment for goods. The payment guarantee pays out on demand by a beneficiary when client fails to honour contract.

Advanced payment guarantee: Mostly used in construction projects, its main purpose is to secure prepayment made by a beneficiary to enable a client to start work.

Lease guarantee: Commonly used by landlords, it forms as a deposit for a lease agreement instead of paying over cash money to a lessor (beneficiary). Clients thus earn interest on own money.

Bank Windhoek’s demand guarantees are subject to the International Chamber of Commerce Uniform Rules for Demand Guarantees.

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