Guarantee management: background and issues
A guarantee is a commitment signed with a financial institution (bank, insurance company…) that covers the beneficiary in case of default or breach of a contractual obligation. The guarantor agrees to pay the beneficiary if the applicant company does not fulfil its obligations. Therefore, it is a tool that assures the two parties involved that all contractual obligations will be met.
Before the financial crisis, the security market was stable, well standardised with established regulations. Since then, guarantee demands have been increasing, mainly as it relates to the creditworthiness of the counterparties. At the same time, interest rates have become very low, increasing in proportion to the share of financial costs associated with guarantees…
At the crossroads of sales, financial and legal expertise, guarantees play an essential role in the activity of a company, depending on the business domain.
Every market and every law requires a different type of bond. Some are legal obligations, while others are related to business contracts. Examples include:
- market guarantees for the construction and public works industry
- manufacturer guarantees for real estate
- environmental guarantees for the operators of the Establishments Classified for Environmental Protection (French law: ICPE),
- customs guarantees for freight forwarders and exporters
- financial guarantees for government agencies or food-processing industry and wine producers
- financial guarantees for the tourism industry
- temporary guarantees to cover wages and welfare charges for temporary workers in case of default
- loan guarantees for local authorities to facilitate the realisation of public interest projects
Guarantee management systems need to handle the workflow between the issue and the release, throughout the contract term. Guarantees generally follow various steps:
- Request management
- Guarantor selection
- Text and clause validation
- Compliance validation with respect to the other open lines
- Issue of guarantee
- Delivery of guarantee contract to beneficiary
- Monitoring and payment of associated fees
- Events and guarantee schedule management
- Potentially, guarantee execution
- Release of guarantee
Regarding the issue itself, it can follow different patterns ranging from very simple to very complex: the guarantee may involve a bank, the parent company or a local guarantor, a single or a pool of guarantors, it may concern a business or a group of businesses.. This in turn makes the requirement for a guarantee risk management system more and more important.
With Fairways Guarantees for corporates and Alliance for local authorities, Finance Active proposes SaaS solutions that allow you to better control your guarantees and to efficiently manage your transactions. Contact us for more information about your next financial guarantee management system.