Bonds and guarantees are a way banks underpin credit agreements between businesses and their investors. These products give a buyer the greater security of a financial guarantee if a seller does not meet their contractual obligations. If the seller fails to deliver the goods or services as described in the contract, the buyer can “call” the bond or guarantee and thereby receive financial compensation from the seller’s bank.

Different types of bonds and guarantees:

Tender Guarantee

Designed to show a buyer that a company bidding for a contract is serious about fulfilling its terms. Failure to take up the contract results in a penalty for the amount of the bond – usually between 2 and 5 per cent of the contract value. Also known as Bid Bonds.

Advance Payment Guarantee

Protects buyers who have made an advance payment to a seller before the contract has been completed. It guarantees that the seller will refund any advance payments to the buyer if the goods or services are unsatisfactory.

Retention Money Guarantee

Enables the early release of funds that a buyer would otherwise withhold until the completion of any warranty period contained in the contract. It represents an obligation on the part of a bank to pay a specified sum in advance to the buyer if the supplier fails to meet its contractual obligations.

Performance Guarantee

Guarantees that the goods or services supplied will be of the required standard. If not, a penalty of 10 per cent of the contract price – and sometimes more – is payable. This type of guarantee is often required while a tender guarantee is still in place, and may be issued in addition to an advance payment or retention guarantee.

Customs Bond

Allows the payment of duty on imported goods to be deferred, guaranteeing HM Customs & Revenue that it will be paid. This lets a business import and distribute goods before the payment of customs and excise duty, freeing up cash flow.

Standby Letter of Credit

Normally used in the trading of perishable goods, Standby Letters of Credit protect sellers, guaranteeing payment for goods they have already delivered.
They are sometimes used in other countries for all forms of bonds and guarantee given the legal requirement.

What are the benefits of Bonds and Guarantees?

  1. Can be tailored to suit the particular needs of a buyer and seller.
  2. Allow sellers to demonstrate their ability to meet the terms of a contract, backed by their bank.
  3. Demonstrate to buyers that foreign companies can meet the terms of a contract.
  4. Promote international trade by providing both buyers and sellers with the reassurance to do business with partners overseas.

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