Guarantee, herewith you can lend your credit rating – that’s how it works

Guarantee loans belong to the group of so-called “credit loans”. The bank pays the borrower, unlike a normal loan, but no money, but it provides the borrower with their own credit rating. In short, this means that the bank is liable for the claims of a third party against the participant. For this she receives a certain fee. The advantage is that the business partner of the borrower does not have to further check its creditworthiness. This is thus secured against payment defaults.

The guarantee credit, a special form of credit special

The guarantee credit, a special form of credit special

The guarantee loan is considered a special form of corporate lending. This is practically the assumption of a guarantee or the issuance of a guarantee by the bank.

Liquid funds are not awarded in the guarantee loan, which is why this form is a so-called “loan lending”. The own creditworthiness of the institute is thus made available to the customer.

For the borrower, this construction offers significant benefits. Since no liquid assets are made available, the fee for this type of guarantee is usually well below the so-called “market interest rate”. Banks are also benefiting from this form of loan because they report such loans as a contingent liability. This means that they have less equity to hold than an ordinary loan, provided that there is no actual obligation to pay.

How exactly does a guarantee guarantee?

How exactly does a guarantee guarantee?

Transactions with new customers or even suppliers may expose companies to insolvency. For new business, the seller can not be 100 percent sure that the buyer can actually pay for the goods or services because he does not know them yet. Uncertainty is particularly high in transactions that have a long payment term or are often very large for foreign customers. In order for a certain business to be able to come about anyway, many buyers offer the guarantee as collateral, which is now regarded as collateral for the business partner.

A good example from practice:

A company wants to start a new collaboration with a UK company. This involves furniture worth one million euros, which is to be sold to the corresponding furniture chain. However, the companies have not previously done business with each other. As far as payment practices are concerned, the local company does not know how the British partner company behaves. For this reason, the British company offers to hedge the business via the guarantee credit. This shows that the company has a high credit rating, because only then is a bank willing to actually assume a guarantee.

The terms at NevalCredit

Most standard avocations are given a term of at least 1 month. However, it always depends on the transaction. Guarantees may have a limited or indefinite term. The so-called guarantee obligation of the credit institution expires when the borrower has fulfilled its obligation towards its business partner.

The interest

An interest rate in the true sense does not exist in this type of loan. The guarantee commission fully covers the costs of the bank, which turns out to be an advantage over conventional loans.

The collateral

An avisor does not necessarily have to provide security. The creditworthiness is comprehensively tested in advance by the lending institution, such as, for example, in the case of an installment loan. During the term of the guarantee, the borrower must always inform the bank about economic and financial changes. Surplus accounts, annual reports, etc. must be submitted. Securities, real estate, bank deposits can theoretically serve as collateral for the bank. Even life insurance but also savings contracts can be used.

Guarantee credits and termination

If the loan has a fixed term, the agreement between the borrower and the credit institution will be terminated at the end of this commitment. If the guarantee is for an indefinite term, the payment obligation ends by the lender releasing the institution from its liability. This is usually the case when the receivables from the counterparty have been fully settled.

If there is no other agreement regarding the termination, termination can also be made at any time without notice. Usually this comes about when the bank doubts the security of the financing or the specified collateral has not been provided etc.

Guarantee credit in the summary

Guarantee credit in the summary

A guarantee loan is not a normal loan, but a kind of guarantee that the bank grants to the borrower. Particularly when dealing with new or foreign customers, the guarantee loan is often used, because the new customer is still an uncertain business partner with regard to his payment behavior. The participant benefits from this type of loan, as does the bank itself, which charges a certain fee for the loan.

A guarantee loan can be fixed-term or permanent and usually ends with the settlement of the claims of the business partner. If the credit institution doubts the collateral of the borrower, the credit institution can nevertheless always terminate the loan, unless otherwise agreed. Banks and institutions are therefore looking very closely at the collateral of the hirer before granting this type of loan.