Economic guarantee

The economic guarantee is a support contract, offered by financial institutions, where the guarantor institution undertakes to respond for the late payment of a commercial or financing operation.

That is, the guarantor ensures the future disbursement of a certain amount of money in case of default. In return, he receives a periodic commission from the guarantor.

Types of economic guarantee

There are two types of economic guarantee:

  • Commercial Guarantee:It is when the financial institution guarantees the payment of a commercial operation, for example, the sale of a good. Likewise, tax settlement can be guaranteed  . Another example is that of a company that has made a payment on account for the provision of a service. Thus, the guarantee guarantees the return of the money delivered in advance if the seller fails to comply with his commitment.
  • Financial Guarantee:This type of guarantee ensures compliance with financial obligations such as loans , bills of exchange or promissory notes . For example, if the guarantor agrees to respond for the reimbursement of a credit acquired from his client with another banking institution.

Advantages and disadvantages of the economic guarantee

The main advantage of an economic guarantee is that it guarantees the fulfillment of a commitment. That is, it gives greater security to be able to specify, for example, a business. This is important, in particular, if both parties to the contract have not had a relationship in the past.

However, acquiring a guarantee implies an additional expense that will be paid for several periods. Therefore it is advisable to evaluate other alternatives such as surety insurance that could be less expensive. Said policy indemnifies the insured if the policyholder does not know his contractual obligations.

It is worth mentioning that surety insurance is common in public contracts. The coverage is acquired by the contractor, which is a service provider, and the beneficiary is the public administration.

 

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