• An abstract payment obligation – guarantee at first demand represents an abstract payment obligation by the issuing  bank provided the beneficiary has not refused to accept such guarantee.
  
• Guarantee's independence from the underlying contract – although it has resulted from a certain contract between the applicant and the beneficiary to the guarantee, it is by no means connected to the underlying contract.  The rights and obligations arising from the guarantee are fully independent from the underlying contract and are irrelevant for the issuing bank.
  
• Documentary features of the guarantee – documentary character of the guarantee is reflected in its clauses related to the amount, payment terms and due date,  which depend exclusively on the guarantee terms and conditions. In addition to these conditions, the guarantee also specifies when and how to submit a demand for payment, and if additional documents are requested to meet the conditions precedent for the payment under the guarantee. The Guarantor is thus  released from investigating any external facts, such as an unfulfillment of the underlying contract by the applicant or any damage made to the beneficiary due to the applicant's breach of the contract.
  
• The clause on demand request being in compliance   with the guarantee terms and conditions – the beneficiary becomes entitled to make a claim against the guarantee  only if all of its terms and conditions are met. Beneficiary’s failure to submit a document specified in the guarantee, in the form as requested by the guarantee  or the failure to submit a payment demand in an adequate form within validity of the guarantee  will result in the beneficiary losing the right to receive the payment from the guarantee.
  
• The precondition for payment under the guarantee is that the beneficiary sends  a written demand together with the statement confirming the applicant’s failure to comply with the contract, accompanied with the documents required by the guarantee.

The following parties are involved in the process:

• Contractual parties - Exporter and importer
• Intermediaries: Issuing Bank  and/or Counter-guarantor and/or advising Bank
  

A bank guarantee is a reliable security instrument in domestic and foreign trade.

It mitigates various types of risk:

• the risk related to potential counterparty insolvency or non-payment
• the risk related to breach of contractual obligations
• the risk related outside the trade and services
• cost-cutting
• positive impact on the company's cash flow
  
  

While negotiating a contract, the importer requests the exporter to provide a guarantee which will ensure a certain phase of negotiations (e.g. bid, advance payment).

The exporter (applicant) applies to his commercial bank to issue a guarantee in favour of the importer (beneficiary) for a specified amount and specified validity period.

In case of a contract breach by the exporter, the importer submits a demand for payment under the guarantee through the advising bank.

Performance guarantees for:

• Bid Bond - the bank undertakes to pay a specified amount at the investor's first demand, in case the bidder fails to comply with the obligations undertaken in the bid. The guarantee is issued in a specified amount which is usually a percentage of the project (2-5%).
• Advance Payment - the bank undertakes to refund to the beneficiary the advance payment paid to the applicant, in case the applicant fails to meet the contractual obligations.
• Performance Guarantee - the bank undertakes to pay to the beneficiary in case of  the applicant’s/supplier’s contract breach, inadequate performance or inability to finance the full contract implementation.
• Warranty - the bank undertakes to pay to the beneficiary if the applicant/contractor fails to fix any shortcomings arising in the warranty period.
• Retention Money - with large scale construction projects,  it is common for the investor to retains a certain amount of each interim construction phase as an additional security for good performance. The contractors will thus strive not to keep any cash as a security deposit, offering to the investor a bank guarantee instead.

Payment Guarantees  ensure that  beneficiaries will be paid in timely manner for the delivered goods and/or provided services. The amount of a payment guarantee depends on the value of the underlying contract, but it could also be lower. The validity of the payment guarantee depends on time needed to implement the underlying contract and timely delivery goods or services.

Payment guarantees are issued for the following purposes:

• payment for delivered goods and/or provided services
• repayment of commodity loans
• repayment of financial loans
  
  

Customs guarantees are a security instrument used for temporary import of goods. If imported goods are not exported within a given time limit (regardless of re-export or product finalization), while applicable customs duties have not been paid for such goods, customs authorities will collect the receivables from the guarantee.

Customs guarantees may have the following forms:

a) individual guarantees for:

• customs procedure of releasing the goods to free trade, customs procedure with economic effect and temporary storage
• transit-related customs procedure

b) comprehensive guarantees for:

• customs procedure of releasing the goods to free trade, customs procedure with economic effect and temporary storage
• transit-related customs procedure

A first demand guarantee has a minimum of three participants:

• Applicant
• Guarantor
• Beneficiary

This type of tripartite structure guarantee is known as a direct guarantee, because the issuing bank (the guarantor)  issues the guarantee directly to the beneficiary, without an involvement of other banks.  For direct guarantees in foreign trade , the  issuing bank is seated in the applicant's country, while the beneficiary is located in a different country.

A counter-guarantee is issued if the buyer does not accept security in the form of a demand guarantee issued by the seller's/contractor's bank. The underlying contract will envisage that the guarantee must be issued by a bank in the buyer's country or in a third country. Regardless of the fact whether the issuing bank is in the beneficiary's country or a third country, such guarantee will be an indirect one, i.e. quadrilateral.

Nostro (Import) guarantee -  a guarantee issued by a  bank at the request of a local or foreign legal entity or private individual (importer), in favour of the seller of goods/services. 

Loro (Export) guarantee -  a guarantee issued by a bank (local or foreign) at the request of its client (applicant), in favour of the exporter/beneficiary .

Applicant – a local or foreign entity importing goods/services and giving an order to the bank to issue a guarantee.

Beneficiary – a local or foreign entity exporting goods/services in whose favour the guarantee is issued.

Counter-guarantee –any signed obligation, regardless of its name or description, undertaken by the counter-guarantor toward the other counterparty to issue a guarantee or counter-guarantee and which envisages a payment after presentation of a complying demand for payment under the counter-guarantee issued in favour of the other counterparty.

Counter-guarantor – means a party which issues a counter-guarantee, either in favour of the guarantor or other counter-guarantor and involves a party which acts for its own account;

At first demand – following receipt of a written payment request the bank-guarantor is required to make the payment to the Beneficiary immediately