Guarantees/Bonds

Guarantees/Bonds

Businesses use guarantees and bonds from banks as a means of securing performance and other contractual obligations from trading partners.

Guarantees/Bonds

Businesses use guarantees and bonds from banks as a means of securing performance and other contractual obligations from trading partners. Banks agree to pay the beneficiary a specified amount in the event that its trading partners fails to meet its obligations under a contract.

Buyers usually require on demand or unconditional bonds, which can be called without challenge, while exporters may seek conditional bonds, which require substantiation, such as through an independent arbitrator.

Tender Guarantee/Bid Bond

This provides the beneficiary with financial compensation or remedy if an applicant does not fulfil any of the tender conditions, such as not taking up a contract awarded through the tender process. This may be submitted with other documents required in the invitation to tender, particularly in international trade situations and remain valid during the period of tender, plus a grace period to enable the beneficiary to make a demand.

Performance Bond

This type of guarantee is commonly required at the time of start of a contract and  provides the buyer with financial compensation is the exporter or supplier fails to fulfil the terms of the contract.

Advance Payment/Progress Payment Guarantee

This may be used if an importer or customer must make advance or early stage payments, and guarantees that the beneficiary will be refunded if the exporter or contractor fails to complete a contract. The amount of the refund will depend on the nature of the guarantee and should provide for pro rata refunds so that the value of the guarantee is reduced as work progresses, with progress clearly documented.

Warranty/Maintenance Bond

This provides the buyer with a financial guarantee to cover the satisfactory performance of goods/services, usually factory plant, equipment and other capital, supplied during a specified maintenance or warranty period.

Retention Bond

The supply of capital goods such as factory plant or equipment may be agreed subject to the buyer withhold a small proportion of the contract amount for a period after supply of the plant and machinery. The exporter may choose to receive the full contract amount earlier by issuing a retention bond that covers the amount that would otherwise be withheld. The exporter will request its bank to issue a retention bond in favour of the buyer. Once the buyer receives the retention bond it will transfer the amount of the bond value direct to the exporter by international money transfer.