Bank Guarantees are used for a diverse range of purposes such as credit enhancements, global finance, trade finance, project finance, etc. Gaining access to these financial instruments is a different game altogether.
When purchasing equity, it is important that one has established, successful banking relationships and substantial financial assets. The overall costs of the equity may range anywhere between 40% and 100% of face value. Most people may not be able to take ownership of financial instruments, especially ones that run into millions.
Most people within financial institutions are simply not aware of the nature of the leased financial instrument. On the other hand, banking organizations apply the principles of financial asset leasing rather regularly.
It is possible to get access to financial assets of another party for a fee or some other consideration for a pre-determined term. After the term gets over, the instrument may be returned to the original holder of the asset. The bank instrument may also be extended for another set term.
The asset holder can go for a joint ownership with the borrower. Instrument may also be transferred in ownership downright through the term of leased Bank Guarantee. So, there will be no problem with the instrument title.
Bank asset will be made available through the instrument lease term. The asset is made available with similar rights as in the case instrument were attained through buying of an equity. Now new owner may do the following with the instrument:
- Use as security
A sale is not allowed without permission from the original asset holder. A party can gain access to financial instruments with much less capital investment: Usually the fees range anywhere from 1 to 3 percent a month to 15 to 17 percent per year. This makes leased financial instruments a much more accessible investment.
A borrower should consider more than just having necessary capital. An asset holder would like to ensure return of the leased bank guarantee is returned towards the end of the term. So, all guarantees, obligations, and loans against debt asset will be released prior to the expiration of the term.
Personal or corporate guarantee is not enough. Usually, asset holders demand bank undertaking clearly demonstrating a bank commitment that the instrument (free and clear) will be returned. The commitment should come from a financial institution.
Agreement of borrower possesses its own terms and conditions. These may vary from one asset holder to the other and use of the transaction to the next. A highly rated financial institution or bank undertaking offering a guaranteed safe return of the asset will make borrower the owner of the asset. This way, the borrower may use it the way they would in case they had ownership of equity.
So, leased bank guarantee can be compared to auto leasing or home leasing. Here, the owner is not allowed to sell the asset.
One of the most common issues encountered by parties to a leased bank asset includes disclosure of the nature of ownership with third parties. In short, you cannot list a leased car or a home as owned asset downright. It is also not acceptable to claim a home clear and free after listing it with mortgage loan against the title. One must disclose the nature of the ownership clearly in finance. Any kind of false representation will simply waste time in a transaction. Additionally, the act may also be interpreted as deliberate attempt to misrepresent and defraud a financial asset’s nature. This is an offence under the regulations of financial securities.
In case of a financial transaction, it is crucial to clearly represent the ownership nature of the instrument openly with all parties involved. Under situations where one of the parties has never dealt with leased Bank Guarantee, it is advised to educate them about the feasibility of the financial asset. When the party does not agree for certain reasons, it is advised to look for another party with a successful history.
Most national and international bank guarantee providers offer smart financial solutions for ensuring access to bank guarantees (debt-owned) and other financial instruments. They will also help you make smart use of bank instrument loans and funding.