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# Bank Guarantee Process: How a Guarantee Is Arranged
- URL: https://blog.financely.io/bank-guarantee-process-step-by-step/
- Published: 2026-11-14T21:12:36.000Z
- Updated: 2026-11-14T21:12:36.000Z
- Description: A bank guarantee is a bank's undertaking to pay a beneficiary if its client fails to meet an obligation, or simply on a complying demand. Contractors, suppliers and buyers are asked for them in tenders, construction and supply contracts and import deals. The bank guarantee.
- Author: Financely Debt Advisors
- Tags: Bank Guarantees, Trade Finance

A bank guarantee is a bank's undertaking to pay a beneficiary if its client fails to meet an obligation, or simply on a complying demand. Contractors, suppliers and buyers are asked for them in tenders, construction and supply contracts and import deals. The bank guarantee process is mostly a credit process: the bank is taking your risk, so it approves you first and drafts second. This guide sets out each stage from contract to release.

**Short answer:** fix the guarantee type, amount and wording in the contract, apply to your bank for a guarantee limit, pass credit and KYC review, sign the counter-indemnity and provide any security, and the bank issues the guarantee directly or through a local bank. You then manage reductions, extensions and any demand until the guarantee expires and is released.

## The parties

The **applicant** is the company whose performance or payment is guaranteed. The **guarantor** is the issuing bank. The **beneficiary** is the party that can claim. In an indirect structure, a **counter-guarantor** (your bank) instructs a local bank in the beneficiary's country to issue its own guarantee, backed by your bank's counter-guarantee. For how guarantees compare with letters of credit and standbys, see our [guide to bank guarantees, standbys and letters of credit](https://www.financely.io/bank-guarantees-sblcs-and-letters-of-credit-how-each-instrument-works-and-when-to-use-ones?ref=blog.financely.io).

## The bank guarantee process, step by step

1. ### Confirm the guarantee type and amount in the contract  
Tender documents and contracts usually specify the guarantee type, amount, currency and validity. Check whether the amount reduces as work progresses and what event ends the guarantee. Negotiate these points before you sign, not when the bank reads the draft.
2. ### Agree the wording and governing rules  
Beneficiaries often supply a template. Check whether it is subject to [URDG 758](https://www.financely.io/bank-guarantees-under-urdg-758?ref=blog.financely.io), whether a demand must include a statement of breach, the expiry date or event, and the governing law. Open-ended guarantees with no expiry are hard for banks to approve.
3. ### Apply to your bank for a guarantee limit  
If you have no guarantee line, the bank will want financial statements, the contract, your track record on similar work and the draft wording. If you already have a line, the request draws on that existing line and is mostly a wording review.
4. ### Pass credit approval and agree security  
The bank treats the guarantee as a contingent exposure. Expect a counter-indemnity in the bank's favor and, depending on your credit, cash margin or other security. See [structuring a bank guarantee with third-party collateral](https://blog.financely.io/how-to-structure-a-bank-guarantee-with-third-party-collateral/) where a shareholder or parent supports the application.
5. ### Choose a direct or indirect guarantee  
Some beneficiaries, especially public bodies, accept only guarantees issued by a bank in their own country. Your bank then issues a counter-guarantee to a local bank, which issues the local guarantee. This adds a second bank, its charges and its own approval.
6. ### Bank issues and the beneficiary receives the guarantee  
The guarantee is sent as an authenticated SWIFT message to the beneficiary's bank, or issued on paper where the beneficiary requires it. Ask the beneficiary to confirm receipt and acceptance so the contract can proceed.
7. ### Manage reductions, extensions and demands  
Track the expiry date against the project timeline and request extensions in good time. If the beneficiary sends an "extend or pay" request, the bank will ask whether you agree to extend. If a demand arrives, the guarantor examines it against the guarantee terms. Under URDG 758 article 20(a), the guarantor has five business days following the day of presentation to examine a demand and determine whether it complies.
8. ### Obtain release at expiry  
When the obligation is complete or the guarantee expires, ask the beneficiary to confirm release or return the original. The bank then frees your limit and any margin under your facility terms.

## Common bank guarantee types

| Type                      | What it secures                             | Typically asked for by           | Usually ends                                              |
| ------------------------- | ------------------------------------------- | -------------------------------- | --------------------------------------------------------- |
| Tender (bid) guarantee    | That a bidder signs the contract if awarded | Employer or procurement body     | After award and contract signature, or when the bid fails |
| Performance guarantee     | Completion of the contract to its terms     | Employer or buyer                | At completion or after the defects period                 |
| Advance payment guarantee | Return of an advance if work is not done    | Employer or buyer paying upfront | As the advance is earned through deliveries               |
| Payment guarantee         | That a buyer pays for goods or services     | Seller or supplier               | When payment is made                                      |
| Retention guarantee       | Release of retention money early            | Employer holding retention       | At the end of the retention period                        |
| Warranty guarantee        | Defect remedies after delivery              | Buyer or employer                | At the end of the warranty period                         |

For advance payment guarantees specifically, see [advance payment guarantee services](https://www.financely.io/advance-payment-guarantee-services?ref=blog.financely.io).

## What slows the process

- No existing guarantee line and incomplete financial statements.
- Beneficiary wording with no expiry, unclear demand conditions or unusual governing law.
- Requirement for a local issuing bank in a country where your bank has no correspondent.
- Guarantee amounts that are large relative to your balance sheet.
- Late requests, made after the tender deadline is already close.

## Cost

Banks charge an issuance or commission fee for the period the guarantee is outstanding, plus amendment and any local bank charges. Pricing depends on your credit, the guarantee type, tenor and country, so we do not quote rates here. Ask for the all-in cost including any counter-guarantee bank.

## Legitimate guarantees only

A real bank guarantee is issued by a regulated bank to support a real contract, after that bank has approved the applicant. Offers to lease or rent guarantees, or to issue them for an upfront fee without credit approval, are not part of this process. Our guide to [spotting fake deals and broker chains](https://blog.financely.io/how-to-spot-fake-commodity-deals-and-broker-chains/) covers the warning signs.

## Where an arranger helps

When your bank has no guarantee line, the line is full, or the beneficiary needs a local bank, an arranger can prepare the credit file and approach banks and surety providers that fit the contract and country. Financely does this as an advisor and arranger. It does not issue guarantees, and issuance depends on the bank's approval.

## Frequently Asked Questions

### What is the process to get a bank guarantee?

Agree the guarantee type and wording in your contract, apply to your bank, pass its credit and KYC review, sign a counter-indemnity and provide any security, then the bank issues the guarantee to the beneficiary by authenticated SWIFT message or through a local bank.

### Who applies for a bank guarantee?

The party whose obligation is being guaranteed, such as a contractor or supplier, applies to its own bank. The other party to the contract, such as the employer or buyer, is the beneficiary. In an indirect structure, the applicant's bank acts as counter-guarantor and instructs a local bank in the beneficiary's country to issue the guarantee.

### What is URDG 758?

The ICC Uniform Rules for Demand Guarantees, 2010 revision. Many demand guarantees state they are subject to URDG 758, which sets rules on demands, examination, extend or pay requests and expiry. Under URDG 758 article 20(a), the guarantor has five business days following the day of presentation to examine a demand, so check the beneficiary's template before you sign.

### Does a bank need collateral to issue a guarantee?

A bank issues a guarantee against a credit limit backed by the applicant's financial strength and a counter-indemnity, and often asks for cash margin or other security. The amount depends on the bank's credit view of the applicant. Where a shareholder or parent supports the application, third-party collateral can also be used.

### How is a bank guarantee released?

It ends on its expiry date or event, when the beneficiary returns it or confirms release, or when it is reduced to zero under its terms. The bank then releases the applicant's limit and any cash margin according to the facility terms.

**Need a bank guarantee for a contract or tender?**

See how Financely structures this on [International Bank Guarantee Arrangers for Trade and Project Finance](https://www.financely.io/international-bank-guarantee-arrangers-for-trade-and-project-finance?ref=blog.financely.io), or send the file for review.

[Submit your transaction](https://www.financely.io/deal-submission?ref=blog.financely.io)

*Financely is an advisor and arranger. It does not lend, issue letters of credit or bank guarantees, or take title to goods, and no financing outcome is promised. Any facility depends on the credit approval of the bank or financier. This guide is general information, not legal, tax or regulatory advice.*

Sources and references (checked 14 November 2026)

1. [International Chamber of Commerce, Trade finance and ICC rules (URDG 758, ISP98, UCP 600)](https://iccwbo.org/global-insights/trade-finance/?ref=blog.financely.io)
2. [International Trade Administration, Trade Finance Guide](https://www.trade.gov/report/trade-finance-guide?ref=blog.financely.io)
3. [Hannaford Turner LLP, International Standard Demand Guarantee Practice for URDG 758 (URDG 758 article 20(a))](https://www.hannafordturner.com/news/international-standard-demand-guarantee-practice-for-urdg-758/?ref=blog.financely.io)