Government wants entrepreneurs to show that they have enough money to execute a tender for a certain period before payments come, usually the period is 3 months, this is becoming a trend, so a bank financial guarantee is a letter from your bank that states that the bank guarantees that you have the financial means up to a certain amount, you can include this letter in your bid for a government tender.
Typically, the financial guarantee is a guarantee that you will have enough cash flow to cover the minimum period before your first payment comes for rendering your service, this is usually 3 months.
You will earn points for securing a Financial Guarantee that shows that your business will have enough money or cash to pay for expenses incurred for the minimal time to execute the tender, as stipulated by government.
The Financial Guarantee goal is to make government or company see that your business will have necessary resources to provide the service to government or company and execute the tender successfully, many tenders fail because the entrepreneur run out of money to do the tender.
An example of a typical Financial Guarantee requirement in a tender may look thus:
“The responding bidder must show capacity to deliver a sustainable service for a period of three (3) months without external support.
In order to do so a Bank guarantee letter must be provided and this will count for 10 points towards the Functionality score:
- Supplying a R9 000 000.00 financial guarantee will earn the bidder 10 points;
- Supplying a R6 000 000.00 financial guarantee will earn the bidder 6 points;
- Supplying a R5 000 000.00 financial guarantee will earn the bidder 3 points;
- A guarantee of less than R5 000 000.00 will earn the bidder zero points.
Any other proof of financial resources for funding which the bidder intends on utilising to fund this project can also be submitted. (The Department requires this information to ascertain whether the bidder can carry the initial cash commitments for a period up to three (3) months for the district, or each of the districts, awarded to the bidder without any additional external support).”
Please ask your bank what Financial Guarantee they can provide you if you wish to apply for a tender and in fact actually was awarded it, this exercise of asking your bank will definitely help your business as the bank will probably give you more advice on what criteria you need to comply with.
I am Start-Up what can I do?
A Joint Venture is another business strategy by which you can add capacity to your business when you do have the skills necessary to execute the tender but lark, say, money or machinery.
Find more information by reading our “how to tender in South Africa” general overview article.