Bank Guarantee
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Bank Guarantee- The irrevocable obligation of a bank to pay a sum of money in the event of non-performance of an undertaking by a third party. The guarantee is a separate obligation independent of the principal debt or the contractual relationship between the creditor and the principal debtor. Under the terms of the guarantee the bank undertakes to pay on first demand provided that the conditions contained in the guarantee are fulfilled. In general, guarantees are subject to the laws of the country of the issuing bank.
Performance Guarantee/Bond- The performance bond is a financial instrument guaranteeing that the seller fulfils his performance obligations in the agreed manner and within the agreed time-frame. With the performance bond the bank undertakes, at the seller’s request, to pay the beneficiary the guaranteed amount in the event the supplier has not met or insufficiently fulfilled his contractual obligations. Guarantee amount: Usually between 10%- 12% of the contract amount. Validity: The bond remains valid for the full amount until complete performance of the contract, which generally includes the warranty period for the correct functioning of, for instance,construction contracts, machinery or installations. The period of validity of performance bonds may be two years or longer.
Advance Payment Guarantee - The terms of payment for major export orders generally stipulate that the buyer pays an advance instalment for the purchase of raw materials and for the cost of production. However, he will only agree to such a down-payment after receipt of an advance payment guarantee which ensures that the seller will repay the advance in the event of non-performance of the seller’s contractual delivery obligations. Guarantee amount: The amount of the advance payment.Reductions: In contrast to the performance bond, the advance payment guarantee should stipulate that the guaranteed amount be automatically reduced in proportion to the value of any partial shipments made. Proper utilization of the related documentary credit is usually recognized as evidence of delivery.Validity: The validity of the advance payment guarantee should be limited in such a way that it expires on the date the contractual delivery is made.
This form of trade finance requires monetary security held on deposit with the bank, real estate or anything acceptable to the bank.
