For many suppliers and contractors, a bank guarantee is essential to procurement. Without one, a company may be unable to provide bid security, sign a contract or receive an advance. This often affects procurement under Russia’s Federal Laws No. 44-FZ and 223-FZ, commercial tenders and major agreements with deferred payment.
Entrepreneurs sometimes see a guarantee as a simple document that a bank quickly issues for a fee. Banks treat it much like a credit risk. If the supplier defaults, the customer may submit a claim and the bank must pay within the guaranteed amount.
A bank guarantee is more than tender paperwork. It is the bank’s obligation to pay for a client if the specified conditions are met following a default. The bank therefore assesses the business, contract and risk.
Why a business needs a bank guarantee
Guarantees can be used in different situations. They are most commonly needed by companies entering procurement, winning tenders, signing contracts or receiving an advance from a customer.
Procurement under Laws No. 44-FZ and 223-FZ more often uses the term “independent guarantee”. In business usage it is often still called a bank guarantee, as the guarantor is usually a bank.
Why a guarantee may be preferable to tying up funds
When a company uses its own funds for bid or performance security, those funds temporarily leave working capital. This can be critical when money is needed for goods, materials, logistics, payroll, taxes and fulfilling the contract itself.
A bank guarantee allows the company to retain working capital instead of setting aside the full security amount. The company pays the bank a fee, and the bank provides a guarantee to the customer, leaving more funds available for delivery.
When a contract requires security of several million roubles, tying up that amount may not be beneficial. A guarantee may allow the entrepreneur to retain working capital in the business.
What banks check before issuing a guarantee
Requirements vary, but the bank generally needs to understand whether the company can fulfil the contract and whether the guarantee could create a loss.
Company financial position
The bank assesses revenue, profit, account turnover, tax compliance, debt burden, arrears, litigation and outstanding debts. A more stable financial picture makes obtaining a guarantee easier.
Contract fulfilment experience
Previous similar contracts strengthen an application. Banks need evidence that the business understands delivery, customer relationships and meeting deadlines.
Contract subject
Supplying standard goods differs from complex construction, manufacturing or engineering work. More complex contracts require closer assessment of experience, resources and transaction economics.
Guarantee amount and term
Larger amounts and longer terms increase the bank’s risk. A short-term guarantee for a small amount is generally simpler to assess than a large, long-term one.
Procurement documents
The bank needs tender or contract information: draft contract, records of tender decisions, notice, security amount, deadlines, customer requirements and guarantee conditions.
Why a bank may decline a guarantee
A guarantee rejection does not always prevent a business from participating in procurement. The issue may lie with the particular bank, an unprepared document package or a risky transaction structure.
Weak financial statements
A bank may decline the risk if reported financial statements show losses, minimal revenue or signs of instability.
No experience with similar contracts
If a company takes on a major contract in a new sector for the first time, the bank may consider the delivery risk too high.
High debt burden
Existing loans, leasing, overdrafts, sureties and guarantees already issued affect the company’s limit. A new request may fail because of the combined exposure.
Risky contract
A complex procurement subject, tight deadlines, high penalties, doubtful economics or insufficient margins may concern the bank.
Unsuitable bank
Banks assess sectors, amounts, terms and guarantee types differently. One may decline while another considers a well-prepared application.
Documents usually required
Exact requirements depend on the bank, amount, term and guarantee type. Prepare company and transaction documents in advance.
- Russian Tax ID (INN) and company details;
- financial statements or tax returns;
- business bank account turnover;
- details of existing loans, leasing and guarantees;
- procurement link or draft contract;
- security amount and guarantee validity period;
- customer details and fulfilment terms;
- evidence of similar completed contracts, where available.
Well-prepared documents help the bank assess the application sooner. Missing information can delay the process or lead to rejection.
How to improve the likelihood of guarantee approval
A strong application demonstrates that the company can genuinely fulfil the contract, as well as wanting to sign it.
1. Check the contract economics
Assess margins, resources and working capital before applying. A loss-making contract or extremely tight deadlines may signal high risk to the bank.
2. Prepare evidence of experience
Completion certificates, fulfilled contracts, references, similar supplies or completed work show that the company has handled comparable tasks.
3. Choose a bank for the specific need
Select a bank that works with the required amount, term, sector and guarantee type rather than applying indiscriminately.
4. Avoid leaving it until the last day
Guarantees often have a strict submission deadline. Starting at the last minute may leave insufficient time for checks, wording approval and issue.
5. Check the guarantee wording
The customer may reject a guarantee that does not meet procurement requirements. Carefully check the amount, term, conditions, details and wording.
When to contact a business finance broker
Arrange a preliminary assessment in advance if the guarantee is urgent, the amount is large, the contract is unusual, the company has been rejected or documents are uncertain.
NG Finance helps entrepreneurs, Russian LLCs and individual entrepreneurs select a bank for a guarantee, assess prospects, prepare the application and navigate the process to issue. This is especially relevant for government contracts, performance security or advance payment repayment.
A bank guarantee is useful for businesses participating in procurement and contracts. Banks assess the whole transaction risk: the company, experience, contract, amount, term and financial position, as well as documents.
Need a bank guarantee for your business?
Submit a request. We will assess your situation and guarantee requirements, identify suitable banks and explain how to help the assessment progress sooner.
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