If a supplier or contractor requires down payment from their project owner/developer or buyer to meet the start up cost of the project or trade deal; then, they need to provide Down Payment Guarantees on their company’s behalf and in favor of their counterparties. So, what is an Advance Payment Guarantee and how it helps contractors and sellers to get the required down payments from their counter parties; Let we explain here:-
What is Advance Payment Guarantee?
Advance Payment Guarantees are the written commitment issued by a bank; to secure the payments made by the project owner or the buyer; against any default by the contractor or the seller. The main purpose of this bond is to ensure that in case if the contractor or the seller defaults in performance; then the client can call the bond; to recover the advance made. This also referred to as Down Payment Bond.
Mostly on a construction project / trade deal, the contractor / the seller asks for upfront from the client; to meet the cost that will incur before the project or deal begins. In such cases, the client agrees to make upfront on demand of Down Payment Guarantees in their favor. This acts as a guarantee for the payments made; in case, if any default occurs. For instance, if the contractor / the seller becomes bankrupt; or unable to perform as per the agreed contract terms.
There are two types of Bonds, i.e.
On Demand – It means that, in case the claim is request by the client in writing; then the bond amount will be paid out in full without any preconditions to be met.
On Conditional – To avail the bond amount claimed, the client has to provide the proof of the contractor / the seller default; or prove that they did not meet their terms, as stated in the contract.
How Does Advance Payment Guarantee Work in Construction?
It acts as a guarantee issued by a bank upon request of the contractor in favor of the project owner for an amount equal to the upfront received; i.e. generally between 5% and 10% of the contract value.
This is mostly used in the construction projects; compared to imports and exports. In projects, the contractor requests the client to provide upfront; prior start the work on the project to purchase high value plant or the materials required. To make the payments, the client demands a bond from the contractor. And this acts as a security to claim the down payments made; in case of any default or non performance of the contractor.
Benefits of Availing MT760
MT760 give protection to the buyer / project owner who has made an upfront payment to the seller or contractor; once the contract has been signed. They guarantee that any such amounts are refunded to the client; if the seller / contractor fail to complete their job. Apart from these, having MT760 also provides the below mentioned benefits.
- Contractors / sellers receive the required cash to start work on the projects or trade deals.
- Project owner / buyer will have peace of mind that they will receive their advance back; in the event of default of the contract.
- Enhances trust worthiness between the trading partners.
How to Avail Advance Payment Bond?
When you sign the trade contract with a supplier or a contract with a developer and require upfront payment to start the work on the particular trade deal or project; then you can apply for the bond along with the SPA or Signed Contract Agreement.
To avail such bonds from banks, they will demand certain percent of the bond value as a cash margin. Or maybe, the banks require 100% cash margin of the bond value. But for many contractors and sellers, arranging a cash margin seems to be a difficult task. So, they will look for other options to avail the required bond without blocking their cash funds.
Being a leading trade finance providers, we can provide Advance Payment Bonds without cash margin with a hassle free process. We can provide the required bond from our bank account on your behalf within 48 working hours.
Contact us today, we would be happy to discuss with you about your bond requirements.
Do You Require Down Payment Guarantee to Secure Your Advance Payments?