On-demand guarantee
What is an on-demand guarantee, and can the bank refuse to pay?
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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
An on-demand guarantee, or demand guarantee, obliges the bank to pay the beneficiary on a written demand that matches the guarantee's terms, without proof that its customer is actually in default. The bank deals in documents and not in the underlying dispute, so a customer's objection that the work is fine is no reason to refuse; generally only a court order or clear fraud stops payment. A conditional guarantee, by contrast, pays only once the default has been established.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
// WORKED IN
// NEXT TO IT
- Borrowing base
- Dilution (receivables)
- Advance rate
- Eligible receivables
- Concentration limit
- Recourse (receivables finance)
- Invoice discounting
- Trade credit insurance
- Performance bond
- Standby letter of credit (SBLC)
- Documentary collection
- Letter of credit (LC)
- Sub-limit
- Open account
- Discrepancy (letter of credit)
- Documents against acceptance (D/A)
- Early settlement discount
- Aged debtors report
- Collection account
- Availability (borrowing base)
- Usance letter of credit
- Cross-ageing
- Trust receipt
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