What is a Guarantee?
A guarantee is a written undertaking by an institution, (the guarantor) on behalf of a party, (the principal) to pay an agreed amount to another party, (the beneficiary) if the principal defaults in terms of the contract between them.
Type of guarantees
There are generally two types of guarantees. The first is a Co-principal Debtors guarantee where the principal’s defence is the guarantor’s defence. The second is a demand guarantee. This guarantee stand separate of the underlining contract of agreement and any dispute on the underlining contract can not be brought in for consideration for not paying the guarantee except in the event where the actual call in itself is fraudulent.
Benefits of an Insurance Backed Guarantee
- Insurance backed Guarantees do not require 100% collateral.
- In a challenging environment and economy whereby cash is king for every contractor, the insurance backed guarantee does not place un-due burden on the cash flows of the entity.
- Enable the contractor to bid for bigger contracts as the guarantee collateral required is reasonable.
- All collateral held by Insurers earns Interest. The collateral and interest are returned to the client should the guarantee be cancelled and there was no claim.
- Once a guarantee facility has been put into place the issuing of guarantees are effortless.
We endeavour to deal only with insurers who possess a global credit rating of A- or above as far as practically possible. This ensures the easy acceptance of guarantees. Most astute employers do not accept guarantees from an inferior-rated company, or guarantees issued under the National Credit Act (NCA) as the claim settlement abilities are poor in case of the former or unknown in the latter.
Type Bonds and Guarantees
- GM Financials Services specialises in the following type of Guarantees
- Construction Related Guarantees which include Bid Bonds, Advance Payment, Performance and Retention Guarantees.
- Court Bonds
- Mining Rehabilitation Guarantees
- NHBRC Guarantees which include Late Enrolment and Sectional Title Guarantees
- Trade Guarantees which includes Fuel Guarantees, Customs Bonds, Educational Guarantes, Logistics Guarantees and Utility Guarantees
Trade guarantees are a pure financial obligation. The following type of trade guarantees are the most common in South Africa.
- Fuel Guarantees
- Customs Bonds
- Educational Guarantees
- Logistic Guarantees
- Utility Guarantees
- In these uncertain economic times, Fuel Majors are increasingly requesting Guarantees to secure Credit Facilities for the purchase of fuel, Fuel Guarantees are issued to Fuel Majors guaranteeing the payment obligation on a credit account for clients.
- Our team is able to assist commercial fuel suppliers/bulk fuel wholesalers and retail fuel outlets/forecourts with guarantees required in respect of fuel, gas, lubricants and other fuel related by-products such as bitumen products.
- Fuel Guarantees are offered as security for a credit line given by the supplier of fuel. The guarantee states that if the client (buyer) is unable to pay the supplier (seller) on the terms agreed by the two parties, the supplier can claim such payment against the guarantee. This Guarantee could cover the purchasing of fuel.
- Retailers such as service stations have to provide fuel wholesalers with a fuel guarantee to enable the service station to trade on a debit order payment system. If a Fuel Guarantee is not provided to the Fuel Company, the Retailer would have to pay the supplier upfront when placing an order for fuel or supply the Fuel Company with a Bank Guarantee. The latter would have a negative effect on the Retailer’s cash flow and operational ability. With a Fuel Guarantee in place, Retailers are able to manage their cash flow more efficiently.
- A Customs Surety Bond is a contract used for guaranteeing that a specific obligation will be fulfilled between Customs (SARS) and an importer for any given import transaction, It insures SARS against non-payment. The main purpose of a customs bond is to guarantee the payment of import duties and taxes by the importer to SARS.
- Customs Guarantees are generally guarantees issued for Deferred Duty & VAT, Bonded Warehouse, Temporary Import, Customs Rebate and manufacturer of an excisable product.
Education Guarantees are a requirement with every registration of a new Private Further Education and Training Institution (FETs) with the Department of Higher Education and Training. These guarantees are in line with the requirements of the Further Education and Training Colleges Act 2006 (Act No.16 of 2006) and the Regulations for the Registration of Private Further Education and Training Institutions.
We are able to provide our clients with sound, expert advice on multiple quotations with the most competitive rates in the country backed by the South Africa’s top insurers.
This guarantee is issued by the insurance company to private institutions to ensure that their contractual obligations will be fulfilled. The beneficiary of the guarantee (students) will have financial protection against loss in the event that the institution is unable to offer its tuition services as a result of closure.
Students benefit in that they will get a placement with another institution to complete the course or also they get reimbursement of the fees paid for the tuition or course. The guarantees are also only issued for accredited courses.
Logistics Guarantees are offered as security to Logistics Suppliers such as Transnet, Freight Rail (TFR), Portnet in line with their policy. The guarantee usually states that if the client does not adhere to the terms as laid out by the beneficiary of the guarantee, the beneficiary can claim such payment against the guarantee.
Parastatals such as Eskom, Water Boards and other entities such as municipalities and other local authorities usually require large upfront cash deposits for them to provide large consumers with the connection of their services such as water connections and electricity connections. This Guarantee would be put in place to protect the service provider against non-payment or default by the consumer for the services rendered.
With a utility Guarantee in place, there are no upfront cash deposits needed which will enable you to have enough cash flow to focus on other operational aspects of your business.
Facility for Performance Guarantee ApplicationQuestionnaire
Performance Guarantee for a new project (if you have a facility in place) - Questionnaire
Advance payment Guarantee App Form (if you have a facility in place) - Questionnaire
Construction Guarantees / Bonds
The following Construction Guarantees are available in the African market
- Advance Payment Guarantees and Materials of Site Guarantees
- Performance Guarantees
- Retention Guarantees
- Bid Bonds Guarantees
Advance Payment Guarantee/Bond
Some contracts make provision for Employers/Principals to pre-finance a contractor by making payments before the commencement of the contract. The Employer/Principal secures such a risk by requiring an advance payment guarantee/bond in return. Usually, the guaranteed amount will decrease in accordance with the percentage of the work certified. The guarantee/bond will be equal to the pre-financed amount - usually 30%.
This bond is required when submitting a tender and secures the employer from the premature withdrawal of a tender and to if the appointed contractor is unable to fulfill its contract award conditions.
This is most probably the most common form of guarantee, which protects the Employer/Principal against the risk of the contractor failing to comply with the conditions of the contract. Traditionally, the guarantee amount is equal to 10% of the contract sum. However, recently the new format JBCC "fixed" (7.5%) guarantee or "variable" (12.5% reducing to 2%) guarantee was introduced, of which the latter version includes a retention provision.
Retention Guarantee / Bond
The bonds effectively replace the actual retention fund. Most contracts make an allowance for the Employer/Principal to retain a percentage of the funds payable to the contractor during the construction period as a form of security against default or defective work. A portion of the funds retained is paid out at the end of the construction period and the balance at the end of the maintenance (defects liability) period. Funds released with a guarantee/bond significantly enhance working capital.
"South Africa has identified electricity as being a possible hinge on growth due to the increasing demand. With the high level of renewable energy potential, a target of 10 000 GWh with 3 725 to be generated from renewable energy sources has been set as the new target to ensure that electricity demands are met with, which is in accordance with the capacity allocated to renewable energy generation in IRP 2010-2030. The Department of Energy has established the Renewable Energy Independent Power Procurement Programme ("REIPPPP") that has been designed so as to contribute towards the target of 3725 MW and towards social-economic and environmentally sustainable growth, and to start and stimulate the renewable industry in South Africa." In keeping with the GM Financial Services culture of solutioning our clients, relationships have been created with guarantors in the market to provide insurance backed capacity with a total guarantee capacity in excess of R 1.5 billion per project. Bid Bonds, preferred Bid Bonds, as well as the performance, retention guarantees and advance payment guarantees form part of the suite of products offered.
Court Bonds are Guarantees given in favour of the Master of the High Court by a Guarantor/Insurer. These Bonds are issued to the Master of the High Court by Liquidators and/or Curators (The Appointees) for the due and proper performance of their duties and obligations to the estate that she or he may be administering.
The insurance company (surety) guarantees to pay the master of high court a certain amount if the executor/curator/trustee/liquidator (principal) fails to meet its obligations such as proper administration of estate funds for example.
The guarantee will usually cover the amount of assets the person is handling to ensure proper protection.