Sureties and guarantees always play an important role when business relationships require additional safeguards. Depending on the industry, it is a matter of down payment, bidding, contract performance or warranty guarantees, in foreign trade there are customs and payment guarantees and much more. In a company's own group, letters of comfort come into play when, for example, the parent company assumes liability for the subsidiary.
Money usually only flows in the form of commissions as remuneration for the assumption of liability. A certain percentage of the liability sum flows as a price to the guarantor, usually a credit institution, a credit insurance company or the parent company, according to various calculation models.
Depending on the volume of guarantees (or sureties), the cash flows of the guarantee commission can influence the overall liquidity of the company and should therefore be taken into account by financial management when planning and managing solvency.
Frequently, the possibility of drawing on guarantees in Germany is granted by agreeing credit lines, of which one part can be used for cash and the other part for issuing guarantees. With these multi-purpose or global credit lines, the respective types of credit influence each other, so that the current account line, for example, decreases when additional guarantees are utilised.
Monitoring the credit lines, the guarantee terms and the respective guarantee utilisation per guarantor are among the important tasks of the risk managers who are responsible for the guarantee business in the company. For documentation purposes, they attach all the necessary information to the financial transactions, e.g. by concrete data entry in the TMS, attaching documents and assigning them to portfolios that allow evaluations according to various criteria. In addition to guarantees given, guarantees received can also be included in the analysis.
Managing sureties and guarantees in spreadsheets is simple and practical, but it does not offer sufficient auditing security. Whereas the application process for guarantees used to involve a lot of paperwork and time-consuming adjustments until the certificate was issued, there are now ways to speed up the process and even digitise it completely.
Trinity TMS Functions at a Glance
- Administration of sureties, guarantees and letters of comfort
- Individual transaction types, e.g. for bid, advance payment, customs guarantees
- Linkage to underlying transactions
- Commission calculation
- Maturity lists
- All documents attached
- Portfolio allocation
- Application for/change of guarantees via
and/or
Sample process Digital guarantee management with DVS*:
*DVS = Digital Vault Services GmbH
Benefits
Maximum Transparency
- Up-to-date overview of all contingent liabilities given and received
- Allocation to projects or investments, guarantors, beneficiaries etc.
- Diverse evaluations according to transaction types, guarantors, terms, maturities, purposes
- Documentation by attaching/referencing files
- Daily calculation of contingent liabilities
- Full integration with liquidity planning and cash forecast
Time and Cost Savings
- Strong acceleration of the application and amendment process, especially when using digital guarantees instead of paper
- Eco-friendly: saving paper, time and nerves
- Release of resources through central processing in the TMS
Process Optimisation and Audit Security
- Automated control of guarantee commissions through bank statement reconciliation
- Straight Through Processing from planning to application to booking or booking out
- Use of a modern REST API for opening/changing digital guarantees
- Extension of digital processes to credit institutions and insurance companies
- Inclusion of foreign banks via electronic banking and SWIFT network possible
- End-to-end process tracking, audit trail and dual control principle
Best Practice
All guarantees (given and received, including sureties, letters of comfort or stand-by letters of credit) are recorded in the Trinity TMS module with all parties involved and necessary information. The attachment or linking of documents to the transaction as well as, if applicable, a company view combined with due date monitoring is of great interest. An assignment to certain portfolios (e.g. underlying transactions, same guarantee types, groups of guarantors, references to projects or investments) answers the questions of various stakeholders and provides additional transparency.
Guarantee commissions and other payments from the liability relationship are calculated and are automatically reflected in the mid-/long-term liquidity plan as well as in the account-based cash forecast for the next few days. Drawdowns are added to the lines and can be displayed graphically for a quick overview. In addition to the due date list, the integrated reporting system allows numerous evaluations.
To apply for sureties or guarantees at credit institutions, the required file formats can be generated directly from Trinity TMS and sent to the respective addressees via EBICS or REST API.
While only credit institutions can be reached via EBICS or the SWIFT access of the electronic banking programmes, selected credit insurers can also be addressed via the REST API to the Guarantee Vault platform of Digital Vault Services GmbH (DVS). After the acceptance of liability has been agreed, legally valid digital guarantees are created, which are kept by DVS in its German central register. Qualified, EU-compliant digital signatures can be used for authorisation and it can be assumed that not only the circle of participating banks and insurance companies will grow, but also other (European) countries will join the DVS solution.
Find out more about digital guarantee management in our:
Tags
Guarantee-management, digital-guarantee, surety, letter-of-comfort, digitization, digitalisation, contingent-liabilities, API