What is an 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 the contractor or the seller defaults in performance; then the client can call the bond; to recover the advance payment made. This is also referred to as a Payment Bond.
If a seller or contractor requires advance payment from their buyer or project owner to meet the start-up cost of the project or trade deal; then, they need to provide Advance Payment Bonds in favor of their counter parties.
Mostly on a construction project / trade deal, the contractor / the seller asks for advance payments 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 Advance Payment Bonds in their favor. This acts as a Payment 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 requested 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 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 Bond 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 advance payment made; i.e. generally between 5% and 10% of the contract value.
Compared to buyers and sellers, contractors and project owners prefer to use Advance Payment Bond mostly used in construction projects. In projects, the contractor requests the client to provide advance payments; prior start the work on the project to purchase a plant or the materials required. To make the advance payments, the client demands a bond from the contractor. And this acts as a security to claim the advance payments made; in case of any default or non performance of the contractor.
Benefits of Availing MT760
MT760 secures the advance payment made by the buyer or project owner towards the seller or contractor. This assures that if the seller or contractor fails to complete their job, then they need to refund the advance payments to the counterparty. Apart from this, MT760 also helps contractors and sellers in multiple ways, which are listed as follows:-
- 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 trustworthiness between the trading partners.
How to Avail Advance Payment Bond?
When you sign a contract with a buyer or a project owner, you may require a certain amount of advance payment to start the work on the trade deal or project. In this case, you can apply for the bond along with the SPA or Signed Contract Agreement.
To avail such Payment Bonds from banks, they will demand a certain percent of the bond value as a cash margin. Or maybe, the banks require a 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 Advance Payment Bond without blocking their cash funds.
If you’re looking to get a Guarantee Letter from Bank to get advance payments from your buyer or project owner; then, kindly send us a copy of your contract agreement. We can study your request; then we will get back to you with a complete proposal to get MT760 without blocking your own cash funds.
Being an International Bank Guarantee Providers in Dubai, we follow a simple process to provide Advance Payment Bond on behalf of contractors.
Contact us today, we would be happy to discuss your Payment Bond needs.
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