Guide to Bank Guarantees

If you are exporting goods into markets further afield than the European Union, you may be asked by your buyer to raise a bank guarantee in their favour. These are commonly known a “contract bonds” and fall into three categories:

1

Bid Bonds

These tend to be asked for as part of a competitive bidding process and are to protect the buyer from receiving spurious bids that the bidder is unable to go through with for any reason. These are typically for between 3% and 5% of the contract amount.

2

Performance Bonds

This provides a similar protection to the buyer but can be up to 10% of the contract amount and has to be in place beyond the agreed delivery date of the goods being shipped. Raising the performance bond usually releases the bid bond.

3

Advanced Payment Bonds

This is a bank guarantee allowing the buyer to call back the amount of any advance payment they may have made. All bank guarantees are bad news for the exporter, but the advance payment bond is probably the most onerous since banks often require cash collateral before they will issue the bond – making the advance payment self defeating.

Notes on Bonds

To get a guarantee (or “bond”) issued, the exporter will need a facility with his/her banker. This facility will be specifically for the issuance of bonds and may possibly curtail other facilities when a bond is active.

Bonds are in the most part unconditional other than a simple form of claim by the beneficiary. For this reason banks look upon bonds as “cash risk”, or similar or worse than the risk involved in granting overdraft facilities. Lenders will therefore look to be fully secured, requiring a cash deposit held as collateral if a borrower is deemed to already have reached the bank’s appetite limit for lending against the strength of the balance sheet. As mentioned above, this can make advance payments called for the the sales contract self defeating.

Guarantees can be issued directly by UK banks to overseas buyers, but it is common for those buyers to insist on a bank guarantee to be issued by a bank in their country. This is fairly straight forward to achieve as the UK bank can ask for the bond to be issued locally under a counter indemnity from the UK bank. However, this involves two lots of bank charges, one by the UK bank, one by their correspondent bank overseas. Both these charges will be for the account of the exporter.

In general, banks like to have the guarantee returned to them for cancellation, of at least receive an authenticated message that the beneficiary has agreed to it’s cancellation. This is particularly the case where the guarantee has been issued by an overseas bank under a UK bank counter indemnity. Expiry dates can therefore be notional and have little effect without the co-operation of the beneficiary.

Synergy in Trade and Bank Guarantees

If you need to have a bank guarantee issued and your bank is unable to assist, get in touch with us to talk the matter through.

“I started working with Synergy when my business was turning over £150k and with their guidance and support we are now on track to turnover £10m for this year. I would recommend Synergy to anyone looking for support with scaling and funding their business.”

Jordan Roche Jones, Managing Director, Mauvais

We practise a synergetic approach with our clients according to their business needs.