A Bank Guarantee is a promise to pay the beneficiary by the issuing bank in the event of a loss. If the applicant fails in their fiduciary or contractual duty to the beneficiary the issuing bank is legally bound to pay.
The issuing bank is the bank that issues the bank guarantee.
The beneficiary is the beneficiary of the bank guarantee.
The applicant is the issuing banks client. The applicant instructs the issuing bank to issue the bank guarantee. The applicant and the beneficiary will have signed a contract resulting in the bank guarantee being issued.
If a bank guarantee is being used for a credit line or monetisation the only permitted instrument is a Demand Bank Guarantee. This guarantee is specifically issued for monetisation purposes. The demand bank guarantee is governed by ICC Uniform Rules for Demand Guarantees, (URDG 758).
For a detailed description of a Demand Bank Guarantee and URDG758 please got to Format.
Definition of a Standby Letter of Credit
A Standby Letter of Credit is a bank instrument used in trade finance. It is regarded as the payment of last resort. Two parties enter into a contract, a buyer and a seller. The buyer instructs their banker to issue a standby letter of credit in favour of the seller.
If the buyer fails to pay the seller the seller can cover their loss by claiming against the standby letter of credit. This will be done on behalf of the seller by their bankers. They will claim the sum required from the issuing bank. The issuing bank will claim the same from the buyer.
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