How can it help me?
Providing a performance bond can help you meet the requirements of your export contract.
What is it?
A performance bond—also called a performance guarantee—is an undertaking by a bond issuer to pay your buyer a sum of money if you don’t perform your obligations under an export contract.
How does it work?
When you enter into an export contract, a condition of that contract may be that you provide the buyer with a performance bond. The bond gives your buyer assurance that if you don’t perform your obligations under the export contract, they can call the bond (that is, request payment of the bond amount from the bond issuer) to reduce their losses.
The amount of a performance bond is usually stated as a percentage of the export contract value, for example, 10 or 20 per cent (though in some countries, such as the United States, it can be up to 100 per cent of the contract value). The buyer is called the beneficiary of the bond.
A bank or other financial institution can issue a performance 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.
A performance bond is usually issued when you sign the export contract or before you start work on the contract. It remains in force for the term required by the export contract. Your buyer returns the bond when you’ve satisfactorily performed your obligations under the contract. The contract may require you to convert the performance bond into a warranty bond.
A performance 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 a performance bond.
Notes to diagram
- You enter into an export contract with your overseas buyer. The contract requires you to provide a performance bond to the buyer.
- Your bank agrees to issue the bond and you provide security to the bank if required.
- The bank issues the bond to the buyer.
What are the pros and cons?
|Can help you meet the requirements of your export contract
||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 a performance 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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