Finance Types

Bonds and Guarantees

Bonds and Guarantees

Banks and other providers offer a range of bonds and guarantees which support businesses by guaranteeing their ability to meet contractual obligations. They are tailored to suit particular needs and can be used to guarantee both buyers and sellers of goods or services.

Bonds and guarantees can provide a buyer with the security of a financial guarantee should a seller be unable or unwilling to meet its contractual obligation. If the seller fails to deliver the goods or services as described in the contract, the buyer can ‘call upon’ the bond or guarantee and receive financial compensation from the seller’s bank.

Bonds and guarantees can also provide sellers with the security of a financial guarantee should a buyer fail to meet its contractual obligations. Most commonly it will be used by a seller to mitigate the risk of a buyer failing to pay for the goods or services through the guarantee backed by the buyer’s bank.

They are regularly used to facilitate international trade and exporting by demonstrating that companies can meet the terms of a contract and by providing both buyers and sellers with reassurance to do business with overseas partners.

Different types of bonds and guarantees include:

  • Tender Guarantee (also known as Bid Bonds): designed to show a buyer that a company bidding for a contract is serious about fulfilling its terms.
  • Advance Payment Guarantee: protects buyers who have made an advance payment to a seller before the contract has been completed.
  • Retention Money Guarantee: enables the early release of funds that a buyer would otherwise withhold until the completion of any warranty period contained in the contract.
  • Performance Guarantee: guarantees that the goods or services supplied will be of the required standard.
  • Customs Bond: allows the payment of duty on imported goods to be deferred, guaranteeing HM Revenue and Customs that it will be paid. This enables goods to be released from bonded warehouses earlier than they would be otherwise.
  • Standby Letter of Credit: normally used in the trading of perishable goods, Standby Letters of Credit protect sellers, guaranteeing payment for goods they have already delivered.

For more about bonds, guarantees and suretys, visit UK Export Finance (the UK’s export credit agency) and The Department for Business and Trade.