Advance Payment Bank Guarantee Sample

Advance Payment Bank Guarantee Sample

Bank guarantee means any signed undertaking, however named or described, providing for payment on presentation of a complying demand.

An advance payment bank guarantee is a type of bank guarantee.

Under an advance payment bank guarantee, the guarantor undertakes to repay an advanced payment that the principal has received in the event that the principal does not fulfill the terms of its contract.

An advance payment bank guarantee sample will be provided on this page.

The example you can find on this page is prepared as per ICC sample demand guarantee forms.

Advance Payment Bank Guarantee Sample

Beneficiary : Trusted Importhause of Heidelberg                                                          Date : 30.August.2014
Kurfuersten-Anlage 50-60
69000 Heidelberg

Advance Payment Bank Guarantee No. : 2014/001

We have been informed that Al-Aman Soap Factory Co. P.O.Box 2022 Jeddah 24500 K.S.A, (hereinafter called “the principal”), has entered into contract No. 1910201107 dated 19.August.2014 with you, for the supply of 230 Metric Ton/Metric Tons Laundry Soap.

Furthermore we understand that, according to the conditions of the contract, an advance payment in the sum of is to be made against an advance payment guarantee.

At the request of the principal, we First National Commercial Bank K.S.A. hereby irrevocably undertake to pay you any sum or sums not exceeding in total an amount of 100.000,00USD (say One Hundred Thousand USD) upon receipt by us of your first demand in writing and your written statement stating:

that the principal is in breach of his obligations under the underlying contract, and
the respect in which the principal is in breach.

Your demand for payment must also be accompanies by the following documents:

Copy of commercial invoice

It is a condition for any claim and payment under this guarantee to be made that the advance payment referred to above must have been received the principal on his account number 111222333 at The National Commercial Bank (Head Office) Jeddah KSA.

This guarantee shall expire on 30.September.2014 at the latest.

Consequently any demand for payment under it must be received by us at this office on or before that date.

This guarantee is subject to the Uniform Rules for Demand Guarantees, ICC publication No. 758.

A bank guarantee is a promise from a bank or a financial institution like that if a particular borrower defaults on a loan, the bank will cover the loss. A bank guarantee allows the customer, or debtor, to acquire goods, purchase equipment or draw down a loan.

At Kingrise Finance Limited, you can either Buy Bank Guarantee, Lease Bank Guarantee or Rent Bank Guarantees at 4% annual leasing fee. We are direct providers of Bank Guarantees, Standby Letters of Credit, Usance LC, DLC provider, Bank Instrument Provider, financial instrument provider, monetizers of bank instruments, international bank guarantee providers, genuine bank instrument providers, business loan lender, business loan provider, sme loan lender, startup loan lender and project funders.

Guarantees are usually issued by banks, which is why they are also called ‘bank guarantees’; however, they can also be issued by other financial institutions or companies as well.

A demand guarantee could also be called as an independent demand guarantee, autonomous demand guarantee, first demand guarantee or bank guarantee as explained above.

On this article, “bank guarantee” and “demand guarantee” terms used with the same meaning.

Definition: ICC’s URDG 758 defines a demand guarantee as follows: “demand guarantee or guarantee means any signed undertaking, however named or described, providing for payment on presentation of a complying demand”.

Here is another definition of a bank guarantee:

“A demand guarantee is an irrevocable undertaking issued by the guarantor, upon the instructions of the principal to pay the beneficiary any sum that may be demanded by that beneficiary up to a maximum amount determined in the guarantee, upon presentation of a demand conforming with the terms of the guarantee.” (Affaki, 2001, s. 13)

How Does a Bank Guarantee Work in Paper Format?

Buy/Lease/Rent Bank Guarantees from Kingrise Finance Limited
  • Step 1: Principal and beneficiary sign a contract which will be demanding a bank guarantee
  • Step 2: Principal approaches Guarantor to issue a Demand Guarantee in favor of the beneficiary. On this stage principal must supply the terms and conditions of the guarantee to the guarantor by the help of the Bank Guarantee Application Form.
  • Step 3: Guarantor issues the bank guarantee and sends it to the beneficiary.

How Does a Bank Guarantee Work in Swift Format?

How does a bank guarantee work in swift format?
  • Step 1: Principal and beneficiary sign a contract which will be demanding a bank guarantee
  • Step 2: Principal approaches Guarantor to issue a Demand Guarantee in favor of the beneficiary. On this stage principal must supply the terms and conditions of the guarantee to the guarantor by the help of the Bank Guarantee Application Form.
  • Step 3: Guarantor issues the bank guarantee in swift format and sends it via secure online swift platform to the advising bank which is located in the beneficiary’s country.
  • Step 4: Advising bank advices the bank guarantee to the beneficiary in online means.

Parties to Bank Guarantees:

  • Advising Party: Advising party means the party that advises the guarantee at the request of the guarantor.
  • Applicant: Applicant means the party indicated in the guarantee as having its obligation under the underlying relationship supported by the guarantee. The applicant may or may not be the instructing party.
  • Beneficiary: Beneficiary means the party in whose favour a guarantee is issued.
  • Guarantor: Guarantor is the institution that issues the bank guarantee. As per URDG 758 guarantor means the party issuing a guarantee, and includes a party acting for its own account.
  • Instructing Party: Instructing party means the party, other than the counter-guarantor, who gives instructions to issue a guarantee or counter-guarantee and is responsible for indemnifying the guarantor or, in the case of a counter-guarantee, the counter-guarantor. The instructing party may or may not be the applicant.

Types of Bank Guarantees:

Tender Guarantee: A tender guarantee (also known as a tender bond or bid bond) is requested from the tender participants during the tender processes.

The aim of the tender guarantee is to make sure that the tender participants submit workable bids under the tender. A tender guarantee protects the tender organizers against the tender participants’ acts of injustice.

By having the tender guarantee, the tender organizer knows that the participants will comply with the terms of the contract in the event that that the tender is accepted.

Tender guarantees  are usually issued for 2% to 5% of the tender amount.

In some situations, exporters may also be asked for presentation of a tender guarantee by the importers.

Tender Guarantee Sample

Advance Payment Guarantee: An advance payment guarantee secures the advance payment made by importer (buyer, purchaser) if the exporter (seller, supplier) does not fulfill its obligations.

Advance payment guarantees are frequently issued for the exact amount of advance payment that has been given to the exporters (sellers, suppliers).

Advance Payment Guarantee Sample

Performance Guarantee: A performance guarantee (also called a performance bond) protects the importer against the failure of the exporter to meet its contractual obligations.

Performance guarantees are generally issued for 10% to 20% of the contract total; however the guarantee amount may be constraint by the local law of the importer’s country.

Obligations under a performance guarantee or bond could concern supply obligations or obligations concerning function and quality during the agreed period of the guarantee.

Performance Guarantee Sample

Retention Money Guarantee: In big projects such as building a factory plant, supply of complicated machineries and other capital goods, it is often determined that the buyer may keep around 10% of the contract amount for a further period of time even after the exporter delivered the goods or completed the assembly, for example 18 months after the production plant up and running.

The exporter may want to have the full contract amount before the end of this extended period (in the example given above, 18 months) by issuing a retention guarantee that covers the amount that would otherwise be withheld by the buyer.

The exporter will request its bank to issue a retention guarantee in favor of the buyer. Once the buyer receives the retention guarantee he will transfer the amount of the guarantee amount direct to the exporter by T/T payment.

Retention Money Guarantee Sample

Payment Guarantee: Unlike other bank guarantees a payment guarantee secures the payment of the exporter in case the importer does not fulfill its payment obligations.

A payment guarantee can be issued in the form of an endorsement on a draft, also known as an “aval”.

The Importance of Bank Guarantee in a Growing Business

In contemporary international payment transactions, there takes place frequent use of bank guarantees as collateral payment in commercial transactions. The bank guarantee is usually required when it comes to specific business agreements that require stronger commitment and assurance that all contractual obligations will be implemented exactly as indicated. Knowledge of the use of bank guarantees allows better negotiating position in making business, quicker response to the demands of public calls for tenders and the provision of their own claims. Because of its rapid and efficient implementation, the bank guarantee is one of the most commonly used collateral in international business.

A growing business often comes across a bank guarantee while borrowing goods or money from a lender. Here is how bank guarantee helps the debtor, that is, the owner of the growing business, in the day-to-day operations.

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The Importance of Bank Guarantee in a Growing Business

The Bank Co-signs the Lending Documents

When you begin a new business or a new job and apply for a loan, you need a guardian/parent to co-sign the loan application. Similarly, when you own a growing business and look for external investment, the lender will ask for a bank guarantee or bank guarantee in which a reliable bank co-signs the loan document.

In case you are unable to meet the deadline, the bank will pay the outstanding amount to the investor for the time. Now the loan will be transferred on to the bank. You will then pay the amount to the bank at usually a higher rate of interest.

Helpful in International Trade & Expansion

The bank guarantee is extremely helpful in case of international expansion schemes. It is harder for the lender to recover the money from an individual living across international borders. To make sure that the debtor does not default, the lender will most likely ask for a bank guarantee and release the funds only after receiving one.

The international expansion schemes help a business scale to uncharted territories in search of a better or larger return on investment.

Acts as a Moderator

Involving a bank in the deal is actually a good idea for both the lender and the debtor. A reputed bank acts as a moderator for the entire deal so that it flows smoothly. As a moderator, the bank tracks the flow of money from the lender to the debtor and all the way back. In case it senses any foul play, it will warn the participants and pull out from the deal immediately.

This way all three parties, that is, the bank, lender, and the debtor, can mitigate risks at a very early stage before things go sour.

For further information or any inquiries about how to raise capital or project funding via BG/SBLC leasing, please feel free to contact us.

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