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In international trade, it is difficult for foreign buyers of goods and services to accurately assess their suppliers ability to either produce goods as ordered or to provide reimbursement for any default under a contract. One remedy available to buyers is a cross-border guarantee issued by a bank.
A cross-border guarantee does not in itself guarantee performance of the underlying contract. However, it does permit the buyer (beneficiary) to collect a sum of money from the issuing bank on demand as compensation for any breach of the contract. Cross-border guarantees are mainly required in connection with international projects involving the sale of goods or services to foreign buyers, including governments.
Cross-border guarantees may also be required to secure a bank loan in a foreign country or another form of international account receivable.
Types of Guarantees
Bid/Tender Guarantee
Issued in support of an exporter's bid to supply goods or services. If the bid is successful, ensures compensation in the event that the contract is not signed.
Performance Guarantee
Issued as an undertaking to pay a certain sum to the buyer if the exporter fails to carry out the terms of the contract.
Advance Payment Guarantee
Gives protection to the buyer who has made an advance or progress payment to the exporter before the contract has been completed.
Warranty Guarantee
Provides a financial guarantee to cover the satisfactory quality or performance of goods or services supplied during a maintenance or warranty period.
Retention Guarantee
Guarantees the refund of released retention monies to the buyer in the event of non-performance of the exporter's obligations after the contract is completed.
The principal risk of cross-border guarantees is that the buyer could demand payment under the guarantee when not entitled to do so. If you are concerned about this happening, we can help you assess this risk by obtaining bank reports on the foreign buyer.
Standby Letters of Credit
A standby letter of credit can be issued as an alternative to a cross-border guarantee and to satisfy the requirements of the U.S. market.
A standby letter of credit has all the characteristics of a cross-border guarantee except that it must have an expiry date, which can be extended at regular intervals at the option of the exporter, to satisfy the requirements of the buyer.
Please contact us for more information about cross-border guarantees.
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