Types of bank guarantee

Bid bond (tender bond)

Area of application
Primarily in export business, with project tenders.

Purpose
To secure any claims by the party inviting the tender on the tenderer in the event of withdrawal of the bid before its expiry date or if the bid is modified unilaterally – or if the tenderer, upon being awarded the contract, refuses to sign the contract or provide further guarantees on request.

Guarantee amount

In general 2% to 5% of the value of the contract.

Term

Usually short term.

Special features

Quite often the party inviting tenders cannot complete the evaluation of the bids submitted within the specified time. In general the tenderers are then asked to extend the duration of their guarantees. The following associated risks should not be underestimated:

  • changes in the market

  • changes in the price structure

  • inflation

  • etc.

    Bid bonds (tender bonds) often lead to other obligations, e.g. advance payment guarantees and performance bonds.

    In international business, "pay or extend" claims are quite often made under guarantees. This simply extends the validity of the guarantee.

Advance payment guarantee

Area of application
In import-export business, but also in domestic commercial business, trade and industry.

Purpose
To secure any claims by the buyer on the seller for reimbursement of the buyer's advance payment on the contract price before delivery of the goods (or advance payment of the full contract price) – in the event that the seller has failed to meet his or her contractual delivery obligations in full.

Guarantee amount

The amount of the instalment or advance payment.

Term

Up to delivery of the goods plus e.g. 15 days.

Special features
If a documentary credit was opened in connection with the underlying transaction and advised by UBS, the following clause may be included in the guarantee if the shipping documents are submitted to UBS:

«Our guarantee will be automatically reduced by …… per cent of the invoice value with each part-shipment made by … (supplier). Evidence of delivery is deemed to have been provided once …(supplier) has submitted the proper documents to the bank … under documentary credit no. ….»

Performance bond

Area of application
In import-export business, but also in domestic commercial business, trade and industry.

Purpose
To secure any claims by the buyer on the seller arising from default in delivery or performance of the terms of the contract (e.g. construction, assembly, execution).

Guarantee amount

Frequently 5% to 20% of the value of the contract.

Term

Until the contract has been fulfilled.

Special features

In international business, "pay or extend" claims are quite often made under guarantees. This simply extends the validity of the guarantee.

Guarantee for warranty obligations

Area of application
In import-export business, but also in domestic commercial business, trade and industry, where it is more often a surety.

Purpose

To secure any claims by the buyer on the seller due to possible defects appearing after delivery.

Guarantee amount

Frequently 5% to 20% of the value of the contract.

Term
Depends on business sector. Frequently: 1 year after delivery or commissioning.

Special features

In the construction trade, the guarantee for warranty obligation in the form of a simple guarantee or a joint and several guarantee is known as a building (or works) contractor's guarantee. It can also be used in the export business as a "retention bond" (substitute for payment retention, often 5% to 10% of the value of the contract). In international business, "pay or extend"

Payment guarantee

Area of application
In import-export business, the payment guarantee is often used instead of a documentary credit – upon delivery against «open account».

Purpose
To secure any claims by the seller on the buyer for payment of the contract price by the agreed date.

Guarantee amount
Contract price or part thereof.

Term

Payment date plus e.g. 15 days.

Special features
In import-export business, mainly abstract guarantees payable upon first demand.

Guarantee securing a credit line

Area of application
Worldwide.

Purpose
To secure any claims by the lender on the borrower due to a credit (loan, etc.) not being repaid in accordance with the terms of the contract.

Guarantee amount
Amount of the credit. Usually includes a margin to cover accrued interest and incidental expenses.

Term

Expiry of loan plus e.g. 15 days.

Special features

Mainly abstract guarantees in favour of the foreign or domestic lending bank. In international business, «pay or extend» claims are quite often made under guarantees. This simply extends the validity of the guarantee.

Letter of indemnity for missing bill of lading

Area of application
Specifically for importers when the bill of lading is missing.

Purpose

To secure any claims by the shipping line/shipping company on:

  • the buyer resulting from the goods arriving from overseas being released without the original bill of lading being presented (e.g. due to postal delays or even loss).

  • the supplier due to issuance of a replacement bill of lading (original misplaced or lost).

Guarantee amount
1 to 2 years; in practice, however, often unlimited or until the original bill of lading or release document from the beneficiary is presented.

Special features

In practice, the wording of the guarantee is frequently stipulated by the shipowner and must be sent directly by the debtor, with a counter-guarantee from the bank, to the shipping line.