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In international trade, it may be difficult for foreign buyers of goods and services to accurately assess a supplier's ability to either produce goods as ordered, or provide reimbursement for any default under a contract. One way for buyers to reduce their exposure to risk is to acquire 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 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 may also be required to secure a bank loan in a foreign country or another form of international account receivable.
For exporters, 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, Scotiabank can help you assess the risk involved by obtaining bank reports on the foreign buyer.
Types of Guarantees
There are several types of cross-border guarantees, each with a specific purpose.
Standby Letters of Credit
In some situations, a standby letter of credit is more appropriate than a cross-border guarantee.
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