The Guarantees of Trading

The question of guarantees concerns both exporters and importers. There is a series of schemes for treating guarantees other than export credit guarantees.

The bid or tender bond is required to support the exporters offer to supply goods or a contractor’s offer to carry out a service. The bond safeguards a buyer against loss if the tender is awarded but the seller fails to proceed by signing the contract or submitting a performance bond. A bid bond is guaranteed by the seller’s bank and is usually 2% to 5% of the value of the contract.

A performance bond is when the seller’s bid is accepted, the bid bond is replaced by a performance bond, usually 10% of the value of the contract. It is issued by the seller’s bank, guaranteeing that he will supply goods to the standard required by the buyer or perform a service. If the buyer does not accept that goods are up to standard then they can claim under the performance bond.

Under the advance payment guarantee, the buyer pays the seller an agreed percentage of the contract price as an advance payment, which can be claimed back if the goods/services are provided are not satisfactory.

Retention monies guarantee/ progress payment bonds are part of the contract price usually 5% and can be held back by the buyer for a certain period to give time to assure himself that the goods or services supplied are satisfactory for units that may be made on a similar basis.

There may be conditional or unconditional-for example, conditional on the seller a meeting default or having won an arbitration proceeding or legal case. The bank must have a counter indemnity with their client, authorizing debit of the said sum, if money is paid under the guarantee. Unconditional means that the bank will pay up simply on the signed statement by the buyer that the seller has failed in their obligation.

If you liked this financial topic then you might be interested in learning about demark indicators and the forex course.