Unlike consumer products like saving accounts and credit cards, banking products for SMEs in Singapore can be a lot more complex to understand. That’s because the banking needs of companies vastly differ from what we need as individuals.
Companies require numerous types of banking products. One common product that companies typically need to conduct business is a Banker’s Guarantee.
What Is A Banker’s Guarantee?
A Banker’s Guarantee (BG) is essentially a guarantee from a bank, on behalf of a company, to fulfill payment or obligations of a contract to their BG beneficiary. It functions like a ‘security deposit’ placed by the SME with the bank as a third party.
When the contract is fulfilled or payment made in full, the funds placed with the bank by the SME are released back to the firm. Or in the event that the SME fails to meet the terms of the contract, the bank will pay the beneficiary on their behalf.
Why Are Banker’s Guarantee Necessary?
With a BG in place, SMEs are able to acquire goods, secure contracts or attain government licenses needed to proceed with business.
# 1 Performance Guarantee
Banker’s Guarantees are used as performance bonds.
For example, a contractor that is carrying out construction work on behalf of a developer or the government may be required to put up a performance bond, which would usually be a percentage of the overall contract. This could easily be in the tens of millions, depending on the contract size.
Instead of placing deposits with the developer or government, the company can use a BG from a bank. The BG acts as a form of guarantee that if work to be done under the contract were not completed; the developer/government would be able to claim from the company’s BG.
# 2 Financial Guarantee
Certain business operations require a BG to run. These include retailers needing to place a BG with landlords to secure a tenancy agreement, or needing to place a BG with IRAS during GST registration to guarantee that they will pay any tax liabilities.
Or, BG can be used to secure the purchasing of goods. Unlike purchases made between consumers and businesses, where payment is usually made upon the receiving of goods, many business-to-business transactions tend to be based on credit terms.
A company may require the purchase of goods from its suppliers for processing before re-selling them to its customers. This could take some time.
A BG helps the company assure its suppliers that payment for the goods is guaranteed not just by the company, but also by the bank providing the BG. This guarantee provided by a trusted bank helps facilitate transactions between the two companies.
How Do Companies Apply For A Banker’s Guarantee?
While a BG may sound like a complicating product, it’s a relatively simple process for new SMEs or start-up owners to apply for.
Draw down from your trade credit facility
If your company does frequent trade transactions, then you likely already have a trade credit facility with your bank. Your relationship manager at the bank would be able to assist you in getting the BG. Simply give them a call when you need one or some banks like DBS and OCBC allow you to use your corporate online banking service to apply.
Get An Ad-Hoc BG Issuance
But what if your company does not have an existing trade credit facility, and isn’t in the business of making frequent trades?
In such instances, obtaining a trade credit facility wouldn’t make sense since that means paying an unnecessary annual fee for a facility that you would hardly use. The more suitable option will be to get an ad-hoc BG that will be fully cash backed (i.e. you would place deposits with the bank equal to the value of the BG required).
How Much Does An Ad-Hoc BG Costs?
Since it’s more common for SME to need an ad-hoc BG, we did a quick comparison across the 3 local banks on how much these are expected to cost.
|Fee & Charges||Without trade credit facility with OCBC:
2% p.a. or min. $500
|No ad-hoc BG available.||Performance BG:
Tenor ≤ 2 year:
Tenor > 2 year:
2% p.a. or min. $100
WAIVED for all online applications until 30 June 2017
|Application Process||Visit any OCBC Trade Service Centre to submit
|Visit any UOB Group Branch to submit your documents||Apply online at your convenience|
|Expected Processing Time (based on no trade credit facility with bank)||Bank will call you by the next working day. It’s not indicated how long BG will take to be issued.||You must first apply for a trade credit facility by submitting your company financial documents. Estimated 2 – 3 weeks.||3 working days|
|Local Delivery||1) Courier OR
2) SWIFT OR
3) Self-collect at any OCBC Business Centre/OCBC Trade Service Centre
Additional charges & conditions apply for SWIFT or courier delivery
|Self-collect at any UOB Trade Counters||Free Courier Service
Local delivery fees waived for all online applications until 30 June ‘17
Among the three local banks, DBS offers the most convenient solution for SMEs that need ad hoc BGs. You can apply for their BG online and receive it as soon as three days. In addition, they are also waiving off the processing fee from now till 30 June 2017.
And to cap this off, DBS also provides free delivery of the Banker’s Guarantee to any local address, saving you more time.
Hence if you do not have existing credit facility with any banks yet, this would probably be the most convenient way for you to get your BG.
Do you have a question about Banker’s Guarantee, or any other products relating to SME banking? Discuss it with us on Facebook.
This article was written in partnership with DBS.