Introduction to Bonds and Guarantees
Bonds and guarantees can be considered as a way using which finance providers or bank underpins credit agreements amongst businesses and their investors. Such finance products provides buyer greater security of a financial guarantee for the case if a seller is not able to meet their contractual obligations. If the exporter fails in delivering the consignment as per the contract, the buyer has to “call” the bond or guarantee in terms to receive financial compensation from the exporter’s bank.
Since global trading is the contractual basis. One of the biggest factors of global trade is security since the clients are dealing with overseas markets. Here comes the role of bonds and guarantees. A bond or guarantee would be used to provide more security and makes sure that the contractual obligation is not altered and both the parties stand at their end.
In the event where the buyer or the seller couldn’t meet the expectation or deny their contract then the bond could be called out for. Once the bond is called for then the other party who stood by their side of the contract will receive compensation from the bank.
Bonds and Bank guarantee process:
01
Applicant (seller) and creditor (buyer) ascertains that there is a need for a bond or bank guarantee.02
Applicant reaches out to a finance provider for issuing a bond or bank guarantee to the creditor.03
The bank then runs a risk assessment for knowing the risk involved within the process and asks for a security.04
The applicant then provides the bank with the security. Further the bank or the financial service provider processes the bond or bank guarantee.05
Post to this the bond or bank guarantee is sent to the buyer’s (creditor) bank or the creditor, or it can be possible that the applicant itself may be asked to collect it in person and to give it to their creditors.
Benefits of Bonds and Guarantees
- check_circle_outlineCan be designed to meet the specific needs of the buyer and seller.
- check_circle_outlineAllow exporter’s in demonstrating their ability to meet the terms specified within the contract, backed by their bank.
- check_circle_outlineHelps buyers in order to make foreign companies meet the terms and conditions of the contract.
- check_circle_outlinePromotes international trade as it provides both buyers and sellers with the reassurance for doing business with overseas partners.
- check_circle_outlineBonds are viewed as safer investments as compared to stocks.
- check_circle_outlineBonds are often considered to be liquid as it is easy to avail bonk and guarantees as compared to other available modes.
A Bid and Tender bond
This bond is close to between 2% and 5% of the contract value. The sole purpose of this bond is to guarantee that the contract will be taken up if it is awarded. But in any case, where the contract is not conducted then it would give the window for a penalty for the value of the bond. Although the tinder bond mostly conducts to the seller and its banks to persuade them into a performance bond if the contract is granted.
Performance Bonds
Performance can be understood as a quality bond. Performance bonds guarantee that the quality of the product would be maintained and if the product is compromised under usual conditions then certain standards are compromised then a penalty is payable. The penalty would cost around 10% of the contract price stated. This bond is usually followed when the Tender bond is cancelled in the trade. Although it acts as financial guarantees and has no further warranty that the bank would comply if the customer fails to do so.
This bond is usually issued by a bank or an insurance company to guarantee the satisfaction of the offered product.
Advance Payment Bond
This bond is mainly established to provide seller or producer with some sort of assistance in the form of an advance payment. There is much small organisation who would desire to participate in global trading. The advance payment provides them with some window to work on trading flawlessly. But under the influence of unsatisfactory product then the seller is obligated to refund the advance payment made by the buyer. These are usually known as the bonds made on-demand. It means that the value set out in the bond is immediately paid on a demand, without any need for preconditions to be met.
Warranty or maintenance bonds
It was provided as a financial guarantee to cover the satisfactory performance of equipment supplied during the specified maintenance or warranty period. It is undertaken by an issuer to pay the buyer the amount of the warranty obligations for products are not met. Therefore, the compensation will be a stated percentage of the export contract value. Warranty bonds can be both conditional and unconditional both. In the case of conditional warranty bonds, the bond is purchased before the buyer makes the final payment of received goods. Although, the bond is returned by the buyer at the end of the warranty period if the specifications are met.
Guarantees
In the failure of the contractual commitments, a guarantee is issued by a bank based on the instructions of a client and is used as an insurance policy. Letter of Credit issued by the financial institution carries out the duties and ensures credit quality. The Letter of Credit is usually requested by the buyer and can be redeemed on demand.
