In local or international business, it is difficult for buyers of goods and services to accurately assess their suppliers' ability to produce the goods in accordance with the order, or to provide a refund for any breach of contract. One solution available to buyers is a bank-issued Guarantee.
By itself, a Guarantee does not ensure the execution of the underlying contract. However, it does allow the buyer (the beneficiary) to collect a sum of money from the issuing bank as compensation for any breach of the contract. Guarantees are mainly required in connection with projects, including government projects.
Cross-Border Guarantees can also be required to secure a loan in a foreign country or as another form of an international account receivable.
Types of Guarantees:
Issued in support of an offer to provide goods or services. If the offer is successful, it ensures compensation should the contract not be signed.
Issued as a promise to pay the buyer a certain amount if the supplier does not comply with the terms of the contract.
Advance Payment Bond
Issued as a promise to refund the buyer the cash advance that it has made to the supplier in the case of failing to comply with the agreement.
Provides a financial guarantee to cover the satisfactory execution or quality of goods and services provided during a maintenance or guarantee period.