What Is a BG (Bank Guarantee)?

A Bank Guarantee (BG) is a legal and financial undertaking by which a bank guarantees that its customer (the applicant) will meet its obligations to a third party (the beneficiary). Should the applicant fail to fulfil the contract terms, the bank guarantees to pay the beneficiary the stated amount.

Used in international trade and mega-projects, BGs differ from local guarantee letters in that they are governed by globally recognised rules — typically URDG 758. These instruments are among the most prestigious financial tools available, enabling large transaction volumes without disrupting cash flow.

01BG Operational Process and Transfer Procedure

The issuance and approval of an international Bank Guarantee (BG) follows these technical steps:

1. Guarantee Agreement and Draft PreparationThe parties agree on the scope, amount and tenor of the guarantee. The wording (verbiage) of the guarantee letter to be issued by the bank is approved by both parties' legal and finance teams.
2. RWA and Capacity CheckThe issuing bank checks its customer's credit lines and guarantee capacity. Where required, a preliminary SWIFT MT799 message is sent to the counterparty bank confirming that preparations are under way.
3. Issuance of the InstrumentSWIFT MT760: The approved draft is entered into the system by the issuing bank as an official financial instrument and transmitted to the receiving bank via SWIFT MT760, the most secure interbank format. A BG issued via MT760 becomes "unconditional and payable on first demand."
4. Confirmation and ActivationThe receiving bank verifies the digital authentication of the incoming SWIFT message. Once it confirms that the instrument originates from a top-tier bank and is fully compliant with URDG 758, it activates the guarantee in the beneficiary's favour.
5. Expiry and ClosureThe guarantee lapses at the end of the period specified in the contract, or once the obligations have been successfully fulfilled. If the applicant fails to honour its commitment, the beneficiary may apply to the bank to initiate a "calling" of the guarantee.

02Types of BG and Their Applications

Bid Bond

A guarantee submitted when participating in a tender.

Performance Bond

Guarantees that the work will be completed in accordance with the contract.

Advance Payment Guarantee

Protects the down payment made by the buyer to the seller.

Payment Guarantee

A model in which the bank undertakes payment should the seller be unable to collect the price of the goods.

03Why Work with MCF Danışmanlık?

Bank guarantees involve highly complex legal procedures, particularly in cross-border transactions. At MCF Danışmanlık Ltd., we provide expert advisory services on:

structuring texts in line with URDG 758 standards;

tracking and operational management of SWIFT MT760 transfer processes;

using the instrument as collateral within financing (monetisation) projects, through our London-based partner Derwent Global Capital;

and related matters.