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Why building trust through bank guarantees make good business sense

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Covid-19 has made it infinitely more difficult for most companies to do business. Apart from the financial challenges created by the widespread international lockdowns, the requirement for social distancing and remote working relationships has made it very difficult for prospective parties in a business transaction to comprehensively assess the companies they intend doing business with, including the vital requirement to check on their creditworthiness.

However, according to Gys Wilson, Product Head for Guarantees at FNB Business, these challenges and demands associated with remote business dealings need not mean that it is impossible to do business safely during Covid-19, just that parties to any transaction need to find other avenues to secure, or provide the assurances needed that they will deliver on their responsibilities. And this is where bank guarantees can play a vital business enabling role.

“A bank guarantee is essentially a promise from the bank that it will meet the financial obligations of a client if that business doesn’t meet its contractual obligations for whatever reason,” Wilson explains, “which means that all the parties to the transaction can rest assured that there is limited financial risk involved in entering into the agreement.”

Wilson says that bank guarantees have always been an invaluable business solution, but that the commercial challenges of Covid-19 have enhanced the value they offer exponentially. “Bank guarantees are especially useful in situations where a party to a transaction, like a seller or exporter, provider of a service or a landlord need a strong commitment or assurance that they will not be left out of pocket if the buyer or importer, service user or renting party to the transaction defaults on any of the terms of the agreement,” he explains, “and one of the effects of Covid-19 has been that clients are often not in a position to provide this level of assurance themselves – so a bank guarantee is a perfect solution for providing this assurance.

Not only do bank guarantees foster trust between the parties to a transaction, it eliminates the administration for the other party if they were to request other forms of security and the subsequent management of that security. Management of that security includes the administration associated with returning the security at the end of the transaction if there we no issues. As these guarantees can be put in place quickly, it allows businesses, at both ends of the deal, to respond quickly to opportunities. All guarantees are subject to credit approval, but we have great processes to meet our clients’ needs, adds Wilson.

He further explains that an FNB bank guarantee can benefit the vast majority of South African businesses, since they can be customised for every type of transaction. He cites the following as the most common types of guarantees that the bank typically provides:

  • Lease or Rental Guaranteeswhere FNB provides assurance to a landlord of a rental deposit by their tenant. This guarantee serves as a rental deposit on behalf of the client instead of paying a deposit directly to a landlord.
  • Payment Guarantees – where FNB guarantees to meet the payment responsibilities of one party to another, for instance on a large utilities or fuel account.
  • Performance Guarantees – where FNB guarantees the purchaser of a service that they will be compensated should the supplier not perform at the required level. This is a guarantee guaranteeing the capability of our client delivering on a project
  • Bid or Tender Guarantees – where FNB provides assurance to the party offering the tender or bid, that if the applicant is awarded the tender but does not take it up, that they will be financially compensated as to re-run the tender process.”

“He says that these guarantees can be issued locally, to a beneficiary in South Africa, or internationally, either directly to a foreign business transaction partner, or indirectly, though their choice of foreign bank.”

“Ultimately, being able to show that you have a bank as a business partner that is willing to vouch for your financial strength is a great way to secure the trust of another party to a transaction,” Wilson says, “and given the massive shifts in the way that business will be required to operate going forward, being trusted is fast becoming one of the most valuable competitive advantages any business can have.”

These companies have partnered to empower informal retail traders across the Eastern and Southern Africa Region

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