Role of Bond
Role of Guarantees/bonds in international trade
A bank guarantee is an irrevocable obligation of a bank to pay a sum of money to the beneficiary in the event of non-performance of a contract by its customer, the principal. Like letters of credit, performance bonds and advance repayment guarantees are being increasingly used in international trade to secure international financial obligation.
A buyer, to assure himself of the due performance of the sales contract by the seller, may call for the seller to provide a performance bond through his bankers in favor of the buyer, undertaking to compensate the buyer to a certain extent. Similarly, a seller may call upon the buyer to furnish a bank guarantee to a given extent of the sales contract, in the event of the buyer failing to establish satisfactory letter of credit by a given date.
There are four types of guarantees/bonds.
- Shipping Guarantee
- Bid Bonds or Tender Guarantee
- Performance Guarantee or Performance Bond
- Advance Payment Guarantee