In international trade, foreign buyers of goods and services have difficulty in accurately assessing their supplier's ability to either produce goods as ordered, or provide reimbursement for any default under a contract. One remedy available to such buyers is a cross-border guarantee issued by a bank.

A cross-border guarantee does not in itself guarantee performance of the underlying contract. What it does do is 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 for the sale of goods or services to foreign buyers, including governments. They can also be required to secure a bank loan in a foreign country or other form of international account receivable.

Types of Guarantees

Bid/Tender Guarantee
Issued in support of an exporter's bid to supply goods or services and if 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 completion.

The principal risk of cross-border guarantees is that the beneficiary (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.

If you are a Canadian customer we can help you access the protection offered by the Export Development Corporation against "wrongful calling" of your guarantee, as well as guaranteeing us against "rightful calling". This means you do not have to use your credit line for the guarantee.

In some countries, the provisions of local laws and practices permit claims to be submitted beyond the stated expiry date (this prevails particularly in Islamic countries).

Standby Letters of Credit

A standby letter of credit can be issued as an alternative to a guarantee and to satisfy the requirements of the US market.

This has all the characteristics of a 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.

For more information about guarantees, please speak to your Relationship Manager or contact us.