Advance payment guarantee
A contract under which the issuer undertakes to be responsible for the fulfilment of a contractual obligation owed by one person to another if the first person defaults. The issuer’s obligation may be primary (as in an on-demand obligation or indemnity) or secondary (as in a guarantee). An advance payment guarantee or bond is typically used to underpin or guarantee the performance of a commercial contract, such as a contract for the sale of goods (where the buyer is the beneficiary) or a construction contract (where the employer is the beneficiary)
Purpose of Advance Payment Guarantee
A payment guarantee assures a seller the purchase price is paid on a set date.
- An advance payment guarantee acts as collateral for reimbursing advance payment from the buyer if the seller does not supply the specified goods per the contract.
- A credit security bond serves as collateral for repaying a loan.
- A rental guarantee serves as collateral for rental agreement payments.
- A confirmed payment order is an irrevocable obligation where the bank pays the beneficiary a set amount on a given date on the client’s behalf.
- A warranty bond serves as collateral ensuring ordered goods are delivered as agreed.
How does advance payment guarantee work?
The guarantee or bond will provide that if the seller or contractor fails to meet its contractual obligations, the issuer will refund the advance payments made by the buyer or employer.
A performance bond serves as collateral for the buyer’s costs incurred if services or goods are not provided as agreed in the contract.