We are going to explain the difference between a technical guarantee and a financial one, different products that financial institutions can provide and that have specific characteristics for each.
A guarantee (aval) is a contract by which a natural or legal person (guarantor) guarantees the fulfilment of the economic obligations of a third party (the guaranteed party), undertaking to compensate an amount if the guaranteed party fails to meet its obligations.
Financial institutions can request a guarantee when they grant a loan, and public administrations do so when contracting a third party for the provision of a service or the carrying out of a work.
There are three important figures in guarantees:
Guarantor. This is the person or institution that assumes responsibility in the event that the guaranteed party fails to meet its commitments.
Beneficiary. This is the person or institution that receives the amount to be compensated if there is an interruption in the fulfilment of the guaranteed party’s obligations.
Guaranteed party. Person who is backed by a third party in the event of failure to meet their obligations.
What is a guarantee (aval)?
The term guarantee can be interpreted from different points of view, although they all revolve around the same idea.
The simplest definition is the one provided by the Bank of Spain, which considers the guarantee as a guarantee and a commitment to pay towards a third party.
There are also other interpretations, which consider the guarantee as the asset that a person presents in respect of the commitment of an obligation towards a third party. It receives different names: “sureties”, “bonds” or “guarantees”.
Example of a guarantee
A very simple example of a guarantee is what happens in bank loans.
Andrés is a 21-year-old who works part-time and needs money for a course. He goes to the bank and asks for a loan of €15,000.
Even though Andrés lives with his parents and does not have many expenses, the financial institution considers that his salary is so low that he may not be able to take on the debt.
In this case, they require a guarantee from Andrés, so he talks to his mother Sofía, who offers to be his guarantor. If Andrés cannot pay off the liability, it becomes Sofía’s. Generally, the institution also asks Sofía for proof of solvency.
What are the types of guarantees?
According to their nature:
Personal guarantee. When the natural or legal person responds with all their present and future assets in the event of failure to meet their obligations.
Real guarantee. The guarantee is made up of specific assets that serve to back the operation; it can be a property, vehicle, jewellery, etc. If the agreed obligations are not met, the beneficiary may sell the assets to recover the debt.
There are also financial and technical guarantees…
What is a financial guarantee?
A financial guarantee covers possible non-payment of sums of money. The institution undertakes to answer for the late payment of a commercial or financing transaction (loans, credit facilities, etc.). In return, it receives a periodic fee from the guaranteed party.
The advantage of a financial guarantee is that it guarantees the performance of a payment commitment. For example, it offers greater security for closing a deal.
It is important for you to know that acquiring a guarantee from a banking institution generates a periodic expense and may entail the pledging of financial resources.
What is a technical guarantee?
It is used to guarantee a contract; it does not guarantee a debt or a commercial/financial operation.
It is required in the public tenders of the Public Administrations for the award of works or service contracts. In most of these cases, a prior guarantee is requested in order to be able to take part in the public tender for the contract.
An example of a technical guarantee would be surety bonds, perfect for answering before the public administration in processes of concessions, tenders and awards.
At Sammy Free we specialise in this type of technical guarantee, thus covering both national and international projects within the framework of different sectors.
