What is a guarantee credit?

A guarantee credit is also called a bank aval. With a guarantee credit, a bank or credit institution assumes a surety or guarantees arising from warranty agreements on behalf of its customer. The customer of the lending institution in this case is the borrower, whose obligation to a third party is secured by the credit institution. The guarantee credit is not a loan or credit in the conventional sense, but it is nevertheless counted among credit instruments. In a bank aval, the bank or credit institution does not lend money; instead it provides a guarantee of the customer's creditworthiness (solvency).

How does a guarantee credit work?

The surety to be assumed by the lending institution is agreed in writing in a credit agreement with the borrower (customer). This credit agreement (aval credit agreement) is subject to the bank's or credit institution's terms and conditions. The contract between the credit institution and the beneficiary of the surety is based on a surety agreement (agency contract), which is not founded on the general terms and conditions of the bank or credit institution.

In return, the payment of an aval commission by the borrower to the creditor is required for the bank aval. In individual cases, the guarantee credit can be concluded with an insurance company and the creditor. The credit institution acts as guarantor on the basis of the German Civil Code (BGB). In a guarantee credit, the customer of the credit institution is the debtor of the performance to be provided by the credit institution. The lender assumes in a guarantee credit that the debtor is able to fulfill his obligation. This spares the creditor from having to take legal action against the debtor. If the customer of the bank or credit institution cannot fulfill the obligation to the creditor, the liability of the credit institution is converted into a liability to the creditor. In this case, the credit institution (bank) must pay the debt to the creditor. Unlike an assignment, the new creditor (credit institution) automatically takes the place of the old creditor (customer). An additional contract is not necessary for the guarantee credit. These arrangements were previously defined in the bank aval and in the agency contract. In order to keep the credit risk of the bank or credit institution low, the credit institution must analyze the debtor's (customer's) creditworthiness. The assumption of liability by the lenders includes the existing debt and the resulting debts in the event of insolvency. A special feature of the guarantee credit is that this form of granting credit is not entered into the balance sheet. For a company this means that capital and assets are not affected by the granting of the guarantee credit. The key figure of the company's balance sheet total is not negatively affected. Companies are compared to other firms on the basis of a balance sheet analysis.

The surety insurance and the aval commission

In a guarantee credit, an insurance company can take on the role of the credit institution. In this case, the insurer assumes the surety or other guarantees for the debtor. The difference to a credit institution (for example a bank) lies in the different legal form between the beneficiary of the surety and the insurer. The insurance contract can be concluded in the insurer's own name or without naming the person. This type is referred to as insurance for third parties. If the insurance contract is concluded for another person without that person being named, the policyholder is liable in case of doubt. This circumstance is the reason for a limited surety insurance. A report must be submitted to the Deutsche Bundesbank every three months. The legal entity (Deutsche Bundesbank) cooperates with the Federal Financial Supervisory Authority (BaFin). This supervision ensures the fulfillability of the concluded contracts. BaFin secures its legal position towards the insurer in writing. The aval commission is not based on the current interest rate. The service from the concluded agency contract and the risk for the liability of the credit institution form the basis for the amount of the commission. The commission is independent of a separate loan agreement between the credit institution and the debtor in the event of the debtor's insolvency. In this case, the credit institution must meet its obligations to the creditor and, in a separate loan agreement, demand the money from the debtor. An aval commission is below the market interest rate level for the borrower. For the credit institution, the guarantee credit is interesting when it does not have to make payments to the creditor. The commission is charged for the surety without liquid funds (money) having flowed.

The different types of avals

The bank aval or guarantee credit is used in many different areas. For example, there are process avals, rental avals, warranty avals, advance payment avals and customs avals, each for the financing or financial security of the lender (bank).

The process aval is equivalent to a guarantee in the form of a deposited security. The credit institution or bank pays the amount to the creditor in the event of enforcement if there is a positive judgment. The debtor is able to pursue the legal action thanks to the surety, in order to avert enforcement.

The rental aval replaces the cash payment of a rental deposit. The credit institution or bank guarantees for the tenant and the costs arising from a rental agreement. These costs include rent payments, repair services, utility charges and compensation for use. In the case of a warranty surety, the credit institution secures the contractor. In a rental aval, the surety covers the timely rectification of defects in a construction project. The credit institution guarantees the financial means for remedying the situation. The client may only demand the warranty aval from the credit institution if there is a secured primary liability. This must be explicitly agreed in the contract between contractor and client.

The advance payment aval secures the risk of an importer or buyer. After the buyer or importer has made an advance payment for the goods he has ordered, he bears the risk that the goods will not be delivered or that the seller becomes insolvent. This legal situation arises because the advance payment has no counter-performance from the seller. The legal difference between an advance payment guarantee and an advance payment surety is that in a surety the fault depends on the seller. The question of fault therefore lies with the seller. The advance payment guarantee is independent of fault. The seller must make the payment even if no fault can be proven on his part. This difference affects the commission for the guarantee credit.

The customs aval secures the tax claims of a customs authority. This aval becomes valid if the imported goods cannot be sold further or exported in the importing country. The customs aval is to be classified as a tax surety. It secures the deferred claim to tax liabilities, excise duties and customs duties. A deferment is only granted if a guarantee in the form of a security (aval) is provided. Importers and freight forwarders with a public bonded warehouse are able to defer import duties until resale. Without a deferment, the goods must be paid for immediately upon arrival at customs. The aval is a cashless security for the importer, enabling him to defer his goods and sell them by the specified date. For the customs administration, the danger of insolvency of the debtor is eliminated by the aval.

Termination of the aval

The guarantee credit is terminated when the purpose of the surety has been fulfilled. It is not subject to a fixed term like other credits. Repayment of the credit is not necessary for a guarantee credit. The aval is a cashless security. With the return of the original document to the credit institution or bank, the aval is written off. The handing over of the document with the associated write-off of the credit institution is legally effective if the beneficiary of the surety raises no objection or makes no further claims.

The guarantee credit thus occupies a special position among credits. It is not intended to finance acquisitions, but to serve as a guarantee of the customer's creditworthiness by a bank.