Today, before participating in sourcing events the vendors must prove their financial sustainability by providing a guarantee for the execution of obligations in a framework of a contract. Organizers of the sourcing events (e.g. purchasing managers) require the vendors to provide such a guarantee.
One of the most convenient tools for ensuring the fulfillment of obligations to the customer is a bank guarantee, which can be reviewed as an alternative to ensuring security through the organization’s own working capital. A bank guarantee is a more cost-efficient approach compared to other forms of collateral: the guarantee fee, bid security, or commercial loans. Also, a bank guarantee can be obtained in a short time (a few days).
The bid security serves to secure the payments of the customer to the entity that provides a proposal (bidder) in the event that after completing the sourcing event awardee cancels or refuses to sign a contract and fulfill his obligations.
Let’s consider the basic situations that vendors may encounter while participating in sourcing events.
A bank guarantee is a way to ensure the fulfillment of obligations by a vendor. The process of issuing a bank guarantee involves the participation of three parties: the beneficiary, the principal, and the guarantor. The principal is the person (vendor, bidder) at whose request the guarantor issues a bank guarantee. The guarantor issues a written document that contains an obligation to pay a specified amount if the beneficiary submits a relevant request. Banks, other financial institutions and insurance companies can act as guarantors. A beneficiary is an entity in whose favor a bank guarantee is issued.
A contract performance guarantee is a type of bank guarantee in which the guarantor undertakes to pay a certain amount in case the principal fails to fulfill his obligations in the performance of a contract or agreement.
Issuance of a bank guarantee
In order to issue a bank guarantee it is necessary to clarify the amount of money that will be required to ensure participation in the sourcing event, as well as the requirements of the beneficiary. A prerequisite for obtaining such a guarantee is providing a statement that would confirm the financial sustainability of the principal. Optional requirements could be: opening an account with a bank acting as a guarantor, providing reports of financial activities for a specified period, etc.
If during the execution of a transaction, the principal cannot fulfill his obligations, then he acquires the status of a debtor. In this case, the beneficiary applies to the guarantor with a written request containing a requirement to fulfill them accordingly. Then the bank ensures the compliance of the creditor’s requirements with the guarantee obligations and pays the beneficiary the specified amount that was claimed in the bank guarantee.
While obtaining a bank guarantee for participation in a sourcing event, vendors have to make sure that the bank chosen is included in the bank register. Otherwise, the organizers may not accept the bank guarantee, and the vendor risks losing the opportunity to participate in the sourcing event. And, therefore, the vendor may be included in the list of unsustainable suppliers.