How can it help me?
Providing an advance payment bond can help you obtain an advance payment from your overseas buyer to finance an export contract.
What is it?
An advance payment bond—also called an advance payment or repayment guarantee—is an undertaking by a bond issuer to pay your buyer a sum of money in the event that you receive an upfront payment for an export contract but don’t perform the contract.
How does it work?
At the start of an export contract, your buyer may make an upfront payment to you in advance of receiving your goods or services. Your export contract might state that you will receive a number of advance payments (or progress payments) at different stages of the contract.
In return for making the advance payments, your buyer may require you to provide an advance payment bond. This gives them assurance that they can recover part or all of their payments if you don’t fulfil your side of the contract. The buyer is called the beneficiary of the bond.
The amount guaranteed by an advance payment bond is often the value of the advance payment itself, or a large part of the value.
A bank or other financial institution can issue an advance payment bond to your buyer on your behalf. The bond issuer normally assesses your ability to perform the export contract before issuing the bond. Typically, they will also require security from you in case your buyer calls the bond (that is, requests payment of the bond amount from the bond issuer).
An advance payment bond is usually issued before you receive the advance payment. It remains in force for the term required by the export contract. Your buyer returns the bond to the bond issuer when you’ve satisfactorily performed your obligations under the contract. Your contract may require you to convert the advance payment bond into a performance bond or warranty bond.
An advance payment bond can be:
- conditional—the beneficiary can only call the bond when certain conditions are met, or
- unconditional—the beneficiary can call the bond at any time without giving a reason.
The diagram below shows the main steps in issuing an advance payment bond.
Notes to diagram
- You enter into an export contract with your overseas buyer. The contract requires the provision of an advance payment bond in return for the buyer making an advance payment to you.
- Your bank agrees to issue the bond and you provide security to the bank if required.
- The bank issues the bond to the buyer.
- The buyer pays you an advance.
What are the pros and cons?
|Gives your buyer security to make advance payments to you, which may help your cash flow
||Your bank may require you to provide security for the full amount of the bond before issuing it. This could tie up your working capital|
|May help you to secure additional or larger export contracts
||It’s possible that an overseas buyer may unfairly call an advance payment bond when you’re not at fault. Bond insurance may help protect you in these circumstances|
What costs are involved?
Fees and charges depend on the term of the bond, the bond issuer’s risk assessment and the security you provide to the bond issuer.
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