What is a bank guarantee and how to obtain one

Introduction

In the financial world, trust is currency. However, when signing a rental contract or closing a business deal, trust often needs to be backed by something tangible. This is where bank guarantees come into play.

Technically, a bank guarantee is a specific agreement in which a financial institution (the guarantor) commits to fulfilling the obligations of a client (the applicant) towards a third party (the beneficiary), in case the client fails to do so. In short, this defines a bank guarantee is: a financial safety net where the bank steps in to cover the liability if you are unable to meet your commitment.

Characteristics and types of bank guarantees

Not all guarantees serve the same purpose. Depending on the obligation being secured, we can distinguish between two main categories of types of bank guarantees:

• Financial guarantees: The bank commits to paying a specific monetary amount if the client fails to complete a payment (e.g., paying rent to a landlord).
• Technical guarantees: The entity ensures that a non-monetary obligation is met (e.g., executing a public construction contract or delivering a service).

Furthermore, when an entity or person acts as a guarantor, they must provide collateral. This leads to two specific types of coverage:

• Personal Guarantee: The guarantor responds with all their present and future assets. No specific property is tied to the deal, but the guarantor’s entire net worth backs the operation.
• Secured Guarantee: Often referred to as a "Real Guarantee" (Garantía Real), this is limited to a tangible asset, such as a property or cash deposit, acting as collateral.

Who requests a bank guarantee in Spain and why?

According to regulations, three main scenarios usually trigger the need for a bank guarantee in Spain:

1. Financial Institutions: When granting a mortgage, the bank is the beneficiary, and a third party (like a family member) acts as the guarantor. This provides extra security to cover the property value or the associated expenses.
2. Public Administrations: Companies often need to provide guarantees to participate in public tenders or execute government contracts.
3. Private Agreements: The most common case is a rental agreement, where the landlord asks the tenant for a bank guarantee to ensure the monthly repayment of rent is covered in case of default.

Key elements of the contract

The document must clearly include:

• Identification: Full details of the guarantor, the applicant (avalado), and the beneficiary.
• The obligation: A detailed description of what is being guaranteed, the monetary amount, and the deadline (expiry date).
• Execution requirements: The conditions under which the beneficiary can claim the money.
• Cancellation: How and when the guarantee ends to avoid any surprises.

Requirements to obtain a guarantee

Granting a guarantee carries risk for the bank, similar to granting a loan. Therefore, not everyone qualifies automatically. To approve bank guarantees, entities analyze the applicant's profile based on the institution's commercial strategy:

• Legal capacity: Must be of legal age (18 in Spain).
• Economic solvency: The applicant (or the counter-guarantor) must demonstrate sufficient income or assets to cover the outstanding amount if the guarantee is executed.
• Credit history: Having a clean record with no debts or presence in defaulter lists is essential.
• Stability: A stable job or consistent business revenue increases the chances of approval.

How to request a guarantee at the bank

To access this service, the first step is to become a customer. Once you have your account, the process involves  the formalization of the contract before a Notary.

• For a single operation: You will proceed to signing the contract for a coverage policy (póliza de cobertura) before a Notary.
• For multiple operations: Companies often set up a guarantee facility. This is a line of credit dedicated to issuing multiple guarantees up to a certain limit, regulating the relationship between the bank and the company.

This policy details commissions, interest rates, and expenses. At CaixaBank, we help you understand every step of this process, ensuring you have the financial backing you need to move your personal or professional projects forward.