How can it help me?
Providing a warranty bond can help you meet the requirements of your export contract.
What is it?
A warranty bond—also called a maintenance or retention bond—is an undertaking by a bond issuer to pay your buyer a sum of money if you don’t meet your warranty obligations for goods or services you provide under an export contract.
How does it work?
When you’re competing for overseas contracts, it’s often a condition of the contract that you will provide a warranty bond before your buyer makes the final payment.
A warranty bond gives your buyer assurance that if you don’t meet your warranty obligations for the goods or services you’ve provided, the buyer can call the warranty bond (that is, request payment of the bond amount from the bond issuer) to reduce their losses.
The amount of a warranty bond is often stated as a percentage of the export contract value, for example 10 or 20 per cent. The buyer is called the beneficiary of the bond.
A bank or other financial institution can issue a warranty bond to your buyer on your behalf. The bond issuer normally assesses your performance of the export contract and your ability to meet your warranty obligations before issuing the bond. Typically, they will also require security from you in case your buyer calls the warranty bond.
A warranty bond usually remains in force for the term of the warranty. Your buyer returns the bond at the end of the warranty period if the goods or services you’ve provided have met the specifications in your export contract. Your export contract may require you to convert a performance bond or an advance payment bond into a warranty bond.
A warranty 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 warranty bond.
Notes to diagram
- You enter into an export contract with your overseas buyer. The contract requires you to provide a warranty bond to the buyer for the term of the warranty period.
- 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|
|No need for the buyer to keep a retention amount at the end of the contract. The warranty bond provides relief against loss due to a poor standard of work or your failure to rectify defective goods
||It’s possible that an overseas buyer may unfairly call a warranty 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 can provide to the bond issuer.
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