By Alexander Paetzold, COO, Trade Technologies & MD, Trade Technologies Germany GmbH, and Co-written by William Evans, Trade Advisory Board Member
Most companies that handle guarantees well handle only half of them well. The guarantees they issue are tracked, owned, and reviewed. The guarantees they receive are filed. Both types of standbys are critical to the company, are material to its business and can cost real money if mishandled. Only one of them arrives with built-in oversight: a credit line in use, a fee being paid, a bank workflow behind it. The other arrives as a document. Our wider article on managing guarantees and SBLCs end to end sets out why portfolio control gets harder as volume grows. This is an area of weakness where control and oversight usually break first, and it is structural rather than careless.
Why is the outbound side usually well controlled?
The reason for that is straightforward: there is a direct cost incurred, and cost creates an owner.
When your company applies for a guarantee, a series of things happen automatically. A credit line is used. A fee is agreed and will be paid. A bank relationship is engaged. Treasury or trade finance handles the application, because they are the ones who hold the facility. The contingent liability shows up where finance can see it. When an automatic extension is coming up, the issuing bank will generally tell you, because you are its customer.
When issuing standbys, the company reaps the benefit of the bank’s automated systems and credit discipline. As a beneficiary of a standby, the bank does not have credit liability to manage or fees to collect on renewals or expiry dates to manage, so the accountability for action shifts to the beneficiary.
What actually happens to a bank guarantee you receive from abroad?
The textbook sequence is clear enough. The applicant's bank issues the guarantee and sends it to an advising party, usually a correspondent bank in your country. That party checks apparent authenticity and passes it on. You, as beneficiary, are then expected to review it against the underlying contract: expiry date, amount, the documents a demand requires, the form the demand has to take.
That review is the moment the instrument becomes useful or useless to you, and it is the step most often done quickly or not at all.
The reason is that an inbound guarantee reaches you through a different door. It arrives attached to a contract, a tender, or a project, so it can land with sales, procurement, legal, or the project team, not with treasury. It uses none of your credit facilities. You pay hardly any fee for it. It creates no accounting entry demanding attention. Every mechanism that gives an outbound instrument an owner is missing, so it gets filed with the contract and treated as one more executed document.
One detail sharpens the point. Under URDG 758 Article 10, an advising party advises a guarantee without any additional representation or undertaking whatsoever to the beneficiary. It confirms the instrument looks authentic and that the advice reflects what it received. That is all. Nobody in the chain is monitoring the instrument on your behalf, and nobody is meant to be.
What does a beneficiary actually need to know?
A beneficiary's information needs look lighter than an applicant's, and mostly they are. The list is shorter, but every item on it has to be right, and it has to be available before you need it rather than after.
The expiry date and the guarantee's underlying legal framework matter most, along with any claim period that runs past it. So do the documents a complying demand requires, where they have to be presented, and by when. These are not details to look up during a dispute. A demand either complies with the terms of the guarantee or it does not.
Automatic extensions look different from this side. As beneficiary you generally do not track a notice deadline, because the decision is not yours. What you usually get instead is a single signal: under a standby with an automatic extension, the issuer will in most cases notify you if it elects not to extend, commonly 30 or more days before the current expiry. That notice is your warning that the risk cover you have been relying on is ending, and it is often the only warning you will get.
Which raises a practical question worth asking early. Where does that notice land, and would the person who receives it recognize what it is? Market guidance for beneficiaries points the same way: it is worth requiring that a non-extension notice go to more than one named recipient, to reduce the risk of it not arriving or not being acted on in time, and worth checking that the instrument lets you draw on the basis of having received such a notice rather than on some other ground.
What does it cost to treat an inbound guarantee as a legal document?
Three things, and none of them surface until you need the instrument.
The first is a demand you cannot make. The required documents may include a certificate from an engineer, an inspector, or a third party you no longer work with, or a statement in wording your team cannot truthfully give. That is discoverable on day one and painful to discover in month thirty.
The second is a mismatch between the instrument and the obligation. A guarantee that expires before the warranty period it was meant to secure gives you nothing for the gap, and the time to fix that is when it is issued, by asking for an amendment, not later.
The third is quiet lapse. An instrument that expires on schedule looks somewhat like one that is still live if nobody is tracking either. This is the same failure mode described in common operational failures, except that on the inbound side there is often no owner at all, so the record and the reality were never connected in the first place.
How do you close the gap?
Not by building a second system. By giving inbound instruments the same treatment outbound ones get by default.
Record an inbound guarantee as a position on the day it arrives, with the same fields you would capture for one you issued: expiry, any claim period, the demand requirements, where a presentation has to be made, and who owns it. Check it against the contract at that point, while an amendment is still an ordinary request. Make sure any notice from the issuing bank routes to the named owner rather than to a project inbox. Then keep both sides in one view, because the question a treasurer is eventually asked is not only what did we issue, it is what are we exposed to and what protects us.
Three questions test this quickly. Can you list the inbound guarantees protecting you right now, and name an owner for each? If you had to draw on one tomorrow, could you produce the documents it requires? And if a bank sent notice that an instrument would not be extended, who would open the envelope or receive the alert?
Most companies find the outbound answers easy and the inbound answers uncomfortable. This gap is one that many companies face who are standby beneficiaries. It is what happens when one half of the portfolio arrives with controls built-in and the other half arrives as an attachment.
