1. On-demand bank guarantees

An on-demand bank guarantee is an undertaking issued by a bank in favour of a beneficiary, usually the supplier, to pay up to a specified amount when a complying demand is presented. It can provide strong protection against non-payment without requiring the customer to pay for every delivery in advance.

Unlike a simple promise from the customer, the supplier has a direct claim against the issuing bank under the terms of the guarantee. However, payment is not necessarily automatic upon sending a registered letter: the demand must meet the guarantee's documentary, timing and presentation requirements.

On-demand guarantees may be particularly useful for recurring domestic sales. For cross-border transactions, a standby letter of credit (SBLC) is another commonly used bank undertaking. Depending on the instrument, rules such as URDG 758 or ISP98 may apply when expressly incorporated.

The fee depends on the bank, the applicant's financial position, the duration, the amount and any collateral. It is therefore better to obtain a quotation than to assume a fixed annual rate.

2. How a bank guarantee works

1. Agree the commercial terms. Define the covered invoices or contract, guaranteed amount, duration and payment terms.
2. Obtain the guarantee. The customer's bank issues an undertaking in the supplier's favour. The supplier should verify its authenticity independently through appropriate banking channels.
3. Supply and invoice. The supplier delivers under the agreed contract and monitors payment deadlines and the guarantee's remaining validity.
4. Make a complying demand if necessary. If the customer fails to pay, the beneficiary presents the documents specified in the guarantee before expiry and in the required manner.

A bank's refusal to issue a guarantee is not proof of customer insolvency. It may reflect internal credit policies, collateral requirements, exposure limits or commercial considerations. Nevertheless, it is a signal worth investigating.

Where commercially appropriate, the supplier may offer to share the guarantee fee to facilitate negotiations. The allocation of costs should be agreed in advance.

3. What to check before accepting a guarantee

For high-value or cross-border transactions, obtain appropriate legal and banking review before relying on the instrument.

4. Other bank-backed payment instruments

Bank-avalised bill of exchange

A bank-avalised bill of exchange is a bill supported by a bank's aval, subject to the law applicable to the instrument. The bank's undertaking is tied to the bill rather than to a separate guarantee. It can strengthen the seller's payment security and, where accepted by a financial institution, may facilitate discounting before maturity.

Unlike a revolving guarantee covering multiple invoices, each bill generally needs its own properly established aval.

Bank-guaranteed or certified cheque

Cheques backed or certified by a bank may provide additional assurance in jurisdictions where they are available. Their legal effects, validity periods and collection rules vary by country. A bank cheque (cashier's cheque) is issued by the bank itself, but counterfeiting and verification risks remain. Do not treat any cheque as an unconditional guarantee of final payment.

Because cheque-based instruments are less common in many B2B payment environments, confirm their practical availability and legal treatment locally.

Standby letter of credit

For international trade, an SBLC can secure payment while allowing the buyer to pay by ordinary bank transfer. The beneficiary calls on the standby only if the stated conditions are satisfied.

5. Choosing the right protection

Whatever the instrument, the credit manager should align the security with the customer's credit limit, the payment terms and the nature of the commercial relationship.

Other solutions may also be relevant, including a parent company guarantee, receivables security measures or factoring, depending on the transaction and the risks to be covered.