Blog – 2 Column

A deep dive: Simplifying guarantee management for treasury & finance

This article is written by Nomentia Treasurers have a love-hate relationship with guarantees. While they are usually not a big concern as long as there are few, managing hundreds or even thousands of various types of guarantees across different entities, guarantors, beneficiaries, countries, and therefore languages and jurisdictions can be a nightmare, especially without the right tools. Below, we provide insights into what managing guarantees actually means, what the challenges are when doing so and why doing it right equals less time spent and money saved. In the second part of this post, we provide an overview of the capabilities that modern, digital guarantee management solutions offer and their benefits. JOIN OUR FORUM TODATY! Are you an experienced treasurer or someone looking to enhance their knowledge of financial management? We extend a warm welcome to Treasurymastermind.com Join our vibrant community and become a valued member of a network that prioritizes collaboration, expertise, and the pursuit of excellence in corporate treasury. Let’s initiate discussions and together elevate the art and science of treasury management! Why guarantees matter Guarantees facilitate trade by assuring the buyers/project owners (“beneficiaries”) that the guarantor, usually a bank or (credit) insurance company – will uphold a contract in case the seller/contractor (“the applicant” to the guarantee) is unable to do so. They are therefore a vital tool heavily used across sectors as varied as construction, facility management, manufacturing, and retail and across the different stages of a business transaction, from bidding for a project, the delivery of the goods or performance of the services to ensuring pre-agreed services during the warranty period. By committing to paying the agreed amount upon first demand by the buyer, the guarantor (usually a bank or credit insurer) assumes risk. Compensation for this risk is in the form of various guarantee-related fees. Also, guarantors usually only agree to assume a pre-defined amount of risk for any given company in the form of a pre-agreed guarantee facility. Against this background, it is obvious that managing large portfolios can be a challenge. Not only is the timely processing of guarantees from various facilities agreed upon with various banks, but sometimes hundreds, if not thousands, of different types of guarantees can be challenging. What is guarantee management? Guarantee management means the management of all guarantees for a company. A guarantee itself is a way of showing a counterparty that you are a secure contracting party. The guarantee is set up with a third party, most often a bank. The bank acts as a mediator and becomes the guarantor as the guarantee transfers the applicant’s creditworthiness to the bank. ALSO READ Why do companies need to manage their guarantees? Companies that engage in substantial contractual agreements that can impact financial risk need to manage all the related guarantees, provided that a guarantee is issued. As a result, finance and treasury teams typically practice some form of guarantee management, for example, by keeping track of guarantees and status in spreadsheets to gain better control. It’s important to keep track of guarantees in order to move forward with agreements in a timely fashion and to control the costs and risks of agreements. Another important aspect of trade finance is risk mitigation and settling any conflicts between trading partners. For example, the buyer usually wants to mitigate the payment risk and ensure security if, for some reason, the seller does not provide the agreed-upon goods or services. In contrast, the seller wants to mitigate supply chain risk. By using guarantees, companies minimize the risk in such situations and can move forward with agreements in a more secure manner. Challenges in traditional guarantee management processes Guarantee management traditionally implies a good amount of paperwork and manual spreadsheets where information about each guarantee is recorded and updated. The management is, in most cases, also decentralized, where every entity or subsidiary has its own ways of dealing with guarantees. As a result, there is much scattered data in various places, and processing guarantees become slow due to inefficiency and lots of required communication. Especially since several stakeholders are involved throughout a guarantee’s lifecycle, both internally and externally. In practice, that implies that many emails need to be sent back and forth between people, and if various entities need to align on guarantees or a corporation decides to issue guarantees for its subsidiaries, there is no standardized process in place that streamlines the communication, guarantee status, or tasks for all stakeholders. Traditional setups are a nightmare for companies that process tens, hundreds, or thousands of guarantees. Common goals in guarantee management Most companies that are looking to improve their guarantee management processes share the following common goals: Desired guarantee management setups The aforementioned goals are paired with a desired state of guarantee management that is centralized in a digitalized environment. All employees responsible for guarantee management or those with a role in the guarantee lifecycle should be able to log on to that same system, regardless of whether they work for a corporate or a subsidiary. It’s just a matter of user management and ensuring that users have adequate permissions to view and edit the guarantees relevant to their jobs. Communication between colleagues and adjustments to guarantees should only be done in the same system. It should also be able to provide overviews of all guarantees and their statuses, as well as which guarantees require action to move them forward in the process. On top of that, a guarantee management setup should be designed to be standardized for every bank. Typically, banks issue their own guarantee forms that all require information to be filled out slightly differently depending on which bank you are dealing with. This adds another layer of complexity and additional work to the process. Instead, digitalized tools can be used for creating standardized guarantee forms that can be sent to any bank, regardless of their requirements. By doing so, treasurers can save significant time because all guarantee applications follow the same standard digital format. A modern, digital guarantee management process An example…