Financial Guarantee Contract;5 Facts You Must Know

A financial guarantee contract is one that requires the issuer to make specific payments to reimburse the holder for the loss. It incurs when a specific debtor defaults on its payment obligation in accordance with the original or modified terms of a debt instrument.such as a bond or guarantee .  These contracts will initially be valued at their fair value , which, unless there is evidence to the contrary, will be equal to the premium received or the present value of the premiums to be received.

Financial Guarantee Contract

Guarantee (in financial terms) is a written commitment by a third party to repay a debt or fulfill other conditions stipulated by an agreement between two signatories (for example, a purchase agreement based on the results of an auction on the SmartTender electronic trading platform).

Parties to the financial guarantee;Financial Guarantee Contract;5 Facts You Must Know

There are always at least three parties involved in the relationship associated with this type of guarantee:

    1. Principal (debtor) – any natural or legal person who is a signatory to the contract, who applies to a third party with a request for a guarantee.
    2. Beneficiary (creditor) – the second signatory of the agreement, any individual, legal entity or state body to which the principal has financial obligations.
    3. Guarantor – a bank, insurance, financial or credit institution that guarantees the performance of the principal’s obligations and undertakes in writing to pay his debt to the creditor, if necessary. Only an institution that has received an appropriate license from the National Financial Services Commission can be a guarantor.

A feature of the guarantee is that at the time of its signing, the principal has no credit obligations to the beneficiary, and the debt for the purchased goods may never arise.

Types of financial guarantee Contact.

Depending on what the guarantee is issued for, there are the following types of it:

  • tender;
  • payment guarantee;
  • guarantee of the return of the advance payment;
  • contract performance guarantee.

According to the method of issuing the guarantee is:

    • direct – issued by the guarantor to the beneficiary directly, according to the instructions of the principal;
    • indirect – when the guarantor issues a guarantee to the beneficiary according to the instructions of the principal (usually this is another bank) in exchange for his counter guarantee (counter-guarantee). An indirect guarantee is used in international treaties.

by Abdullah Sam
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