Guarantees

In today’s competitive global trading environment, overseas importers are increasingly insistent that exporters support their contractual obligations by providing a guarantee.

A guarantee, or bond as it’s sometimes known, is a written undertaking by a guarantor, usually a bank, to ensure that a supplier or contractor receives compensation in the event of a breach of contract.

What are the key benefits of bonds and bank guarantees?

  • Reassures your supplier that you can meet your financial commitments to supply goods as per the contract
  • Enables you to bid for new business that you might not have considered tendering for
  • Provides protection again non-payment risk
  • Can help your cash flow by enabling the buyer to release funds early

Types of guarantees

There are a wide range of guarantees to cover many kinds of risks including performance related, failure to perform under a contractual obligation or support a financial obligation. The following are the most common guarantees used to support contracts.

  • Bid or tender bond
    • Bid bonds are issued to support a customers’ tender for the supply of goods and services
    • They protect the beneficiary for the guaranteed amount against any losses related to the exporter withdrawing their tender or failing to sign the contract if awarded to them
    • Once the tender is accepted, the bid or tender bond is usually replaced with a performance bond
    • Bid bonds usually cover 2% to 5% of the value of the tender amount and often remain valid for three months after the bid closure date.

    View a sample bid bond (demand type) here

  • Performance Bond
    • A performance bond safeguards the importer (beneficiary) should the exporter or contractor fail to meet their contractual obligations by not meeting or insufficiently fulfilling their contractual delivery obligations
    • Performance bonds are usually issued for 10% to 20% of the contract amount
    • This bond is a financial guarantee and carries no warranty that the bank will complete the contract if its customer fails to do so

    View a sample performance bond (demand type) here

  • Retention Bond
    • Retention bond enables retention monies, which would otherwise be held by the importer beyond the completion of a contract, to be released early
    • If the exporter failed to fulfil the contract, for example if they fail to carry out the work or remedy defects, the retention bond allows the importer to make a demand under the bond for the retention amount
    • A retention bond is a win-win: the importer has the monetary protection they require and the exporter keeps hold of their cash

    View a sample retention bond (demand type) here

  • Advance Payment Bond
    • An advance payment bond is a guarantee given when a sum of money is paid to the exporter before goods or services are supplied
    • This gives protection to the importer who has made an advance payment to the exporter before the contract has been completed
    • An advanced payment bond ensures the importer can recover all or part of the amount paid in advance if the exporter fails to fulfil their contractual obligations
    • It is advisable for the advance payment bond to contain an operative clause making it effective only upon receipt by the exporter of an advance payment
    • Advance payment bonds are usually an agreed percentage of the contract amount – typically 10%-30%

    View a sample advance payment bond (demand type) here

  • Payment Guarantee
    • A payment guarantee provides a payment assurance to the exporter if the importer does not fulfil their payment obligations
    • A payment guarantee can also be issued in the form of an endorsement on a draft, also known as an 'aval'
    • An aval is an endorsement to a bill of exchange (draft) or promissory note rather than a separate document. It is a form of guarantee issued on the importers behalf and is therefore subject to Danske Bank credit approval

    View a sample payment guarantee (demand type) here

  • HMRC Custom Bond/Duty Deferment Bond/VAT Bond
    • A guarantee is given to HM Revenue & Customs
    • It allows a business to defer their duty or tax payments
    • It is important to engage with HMRC and determine the right type of guarantee required before any HMRC guarantee is requested for issuance
    • For Customs Comprehensive Guarantees (CCG2) an EORI number is required. For guidance on CCG2 please visit the HMRC website External link icon.

About guarantees

There are several different types of guarantee, and more than one type can be included in a contract.

Demand guarantee

Requires payment on the first demand. When the issuing bank receives a claim that fulfils the conditions of the guarantee, the issuing bank must pay. This means that the applicant (the customer who has requested the bank to issue the guarantee) has no right to object. Banks cannot enter contractual disputes between trading partners.

Conditional guarantee

Requires payment only upon the fulfilment of certain conditions. The issuing bank will not pay the beneficiary's claim before it has been accepted by the applicant or a court decision stipulates payment. However, it is unacceptable to many overseas buyers and banks in the UK are reluctant in providing this type of guarantee.

Guarantees are subject to local rules and regulations

Local conditions and regulations influence whether Danske Bank or a foreign bank in the beneficiary's country will issue a guarantee.

If a guarantee is issued by a foreign bank, it will not be subject to Northern Irish law. This may mean, for example, that although the expiry date on the guarantee has passed, the local laws in the beneficiary’s country may fail to recognise this expiry date and a claim could still be made by the beneficiary.

If a guarantee is issued by a foreign bank, you may be liable to pay their commission and fees.

Guarantees from abroad

If you are to receive a guarantee from abroad and you would prefer Danske Bank to underwrite the guarantee, we are prepared to issue guarantees on behalf of most banks worldwide.

Important information

Demand guarantees are subject to a set of international rules: Uniform Rules for Demand Guarantees (URDG), Publication No. 758. The rules are issued by the International Chamber of Commerce (ICC) in Paris.

The rules detail the requirements of the parties under a guarantee however these rules may not always be used. Guarantees could be subject to local laws.

Contact your Relationship Manager as credit facilities must be in place to support guarantees.

Whether we provide credit depends on your circumstances, and you must be 18 or over. Lending terms and conditions apply.

You may need to provide security.

Please refer to our Fees and service charges explained – foreign payments leaflet for important information on the Trade Finance charges.

Ready to apply?

Get in touch with us using one of the ways below.

Please note you must be an existing Danske Bank business customer to avail of this service.

If you want to find out more about bonds and guarantees please contact your Relationship Manager.

Alternatively you can speak to one of our Trade Finance specialists.

Telephone : 028 9004 8133

Calls may be recorded. Lines are open between 9am and 5pm Monday to Friday except for bank holidays or other holidays in Northern Ireland when the bank is not open for business.

If you’re an existing Danske Bank business customer, you can apply for a guarantee through District, our online banking platform. Alternatively you can download our guarantee application form. This should be completed and returned to:

Danske Bank, Trade Finance,
Donegall Square West,
Belfast
BT1 6AX

Download an application form