A letter of guarantee, also known as a "guarantee", is a written commitment issued by a bank to a beneficiary at the request of the applicant to ensure that the applicant or the guaranteed person performs its obligations under the contract signed with the beneficiary. There are many types of letters of guarantee and they have a wide range of uses. They can be applied to commodities, labor services, technology trade, engineering project contracting and construction, material import and export declarations, financing from financial institutions, leasing of large complete sets of equipment, litigation preservation, performance of various contractual obligations, etc. field. This article summarizes the standard definitions and scope of application of nine common types of bank guarantees.
1. Bid Bond/Tender Guarantee
Standard definition:
Mainly used for bidding and tendering business, usually the tenderer requires the bidder One of the conditions for participating in the bidding. At the request of the bidder (applicant), a bank (guarantor) issues a letter of guarantee with the bidder as the beneficiary, guaranteeing that the bidder will not cancel the bid midway before the bid opening, will not unilaterally modify the bidding conditions, or will not refuse to sign or sign the contract after winning the bid. Refusal to pay a performance deposit or provide a performance guarantee from a bank, otherwise the bank will pay a certain amount to the tenderer as compensation. Its purpose is to demonstrate the sincerity and qualifications of the bidder.
Scope and purpose of application:
Applicable to all situations where bidders are required to pay a bid deposit during public bidding and negotiation;
Bidders avoid paying The occupation of funds caused by the cash deposit will result in capital gains;
Setting the terms of the letter of guarantee is conducive to safeguarding the legitimate rights and interests of the bidder;
For the tendering party, it can effectively While safeguarding your own interests, you can avoid the cumbersome process of collecting and returning deposits and improve work efficiency.
2. Performance Guarantee/Performance Bond
Standard definition:
It is a guarantee that the bank (guarantor) should provide to one of the parties in the transaction contract (application At the request of a person), a letter of guarantee is issued with the other party as the beneficiary, promising that if the applicant fails to perform its obligations under the contract, the bank will pay a certain amount of money to the beneficiary as compensation.
For suppliers or contractors, it can reduce long-term capital occupation caused by paying cash deposits, obtain capital returns, optimize capital allocation, and protect their own rights and interests;
For buyers or For owners, it can reasonably restrict the behavior of suppliers and contractors, protect their own interests, avoid the cumbersome procedures of collecting and returning deposits, and improve work efficiency.
3. Advance Payment Guarantee / Repayment Guarantee
Standard definition:
Refers to the bank (guarantor) who is the party to the transaction contract At the request of the party (applicant), a letter of guarantee is issued with the other party as the beneficiary. If the applicant fails to perform the obligations stipulated in the contract, the bank will guarantee to repay the amount advanced by the beneficiary or paid to the applicant.
Scope and purpose of application:
Applicable to all projects that include advance payment in the payment method, common in project contracting, goods sales, etc.;
For the contracting party For the buyer or the buyer, it strengthens the constraints on the contractor or supplier to perform the contract as required, and ensures the smooth recovery of the advance payment if the counterparty fails to perform;
For the contractor or supplier Generally speaking, it facilitates the timely arrival of advance payment funds and is conducive to accelerating the capital turnover in project construction or stocking.
4. Quality Guarantee (Quality Guarantee)
Standard definition:
It refers to a guarantee to the buyer or owner upon application by the supplier or contractor, such as If the quality of the goods or projects does not comply with the contract and the seller or contractor is unable to replace or repair the goods as agreed, compensation shall be based on the buyer's or owner's claims.
Scope and purpose of application:
Applicable to project contracting, material supply and procurement contracts;
It fully protects the rights and interests of the buyer or the contractor, and also improves the The market competitiveness of the seller or contractor.
5. Maintenance Guarantee
Standard definition:
At the request of the contractor, the bank issues it to the contractor to guarantee that the contractor will perform its obligations Written commitment to perform contractual obligations during the maintenance period. If the contractor fails to perform the project maintenance obligations stipulated in the contract in the future after the project is completed, or the quality of the project does not meet the contract and the contractor is unable to repair the project, the bank will accept the claim from the contractor and pay compensation in accordance with the guarantee.
Scope and purpose of application:
Applicable to project contracting, material supply and procurement contracts;
It fully protects the rights and interests of the buyer or the contractor, and also improves the The market competitiveness of the seller or contractor.
6. Payment Guarantee
Standard definition:
A payment guarantee refers to a payment guarantee issued by a bank to a seller or contractor at the request of the buyer or the contractor. A written commitment issued by the contracting party to ensure that the buyer will fulfill its payment obligations under the commodity, technology, patent or labor contract, or that the contracting party will pay the project payment according to the progress of the contracted project. According to the different payment methods guaranteed, it can be divided into sight payment guarantee, deferred payment guarantee and installment payment guarantee.
Scope and purpose of application:
Applicable to all commodity trade, technical labor trade, engineering projects, etc. where payment occurs;
For sellers or contractors In other words, it has obtained a guarantee to recover the payment for goods and projects to facilitate its delivery and construction, and facilitate the smooth progress of trade;
For the buyer or the contractor, the payment terms of the payment guarantee can be within a certain period. To a certain extent, it restricts the behavior of sellers and contractors, and ensures that the quality of goods and projects meets the requirements of buyers and contracting parties, thereby safeguarding the interests of buyers and contracting parties.
7. Customs Guarantee (Customs Guarantee)
Standard definition:
Customs Guarantee means that the customs guarantee is required by the importer (including processing trade enterprises) According to the requirement, a written commitment issued by a bank to the customs to ensure that the importer fulfills its duty payment obligations is also called a customs tax-free guarantee, a customs guarantee, and a temporary import guarantee. If the importer fails to pay customs duties on time in the future or fails to implement other specific regulations of the customs, the bank will accept the claim from the customs or the financial institution designated by the customs and pay the compensation in accordance with the letter of guarantee to fulfill the duty payment obligation on its behalf.
Scope and purpose of application:
Applicable to the temporary entry of relevant equipment, instruments and other items into the customs territory of other countries during overseas project contracting and construction, overseas exhibitions, exhibitions, etc.;
Processing trade enterprises import materials and parts, imports of related goods and goods before the relevant countries’ tax reduction and exemption policies for imported goods are not clear, and the customs implements release first and then tax collection of certain goods;
For importers In other words, the capital occupation caused by the payment of tariff deposits has been reduced, the efficiency of capital turnover has been improved, and capital gains have been obtained; Goods staying in customs territory increase costs, and for items that temporarily enter the customs territory of other countries, the cumbersome procedures for tax refunds are reduced;
For customs, it avoids the cumbersome procedures for unnecessary customs clearance and improves customs clearance efficiency. And you can get the guarantee of customs duty payment.
8. Retention Money Guarantee
Standard definition:
Refers to part of the import trade that has not yet been paid to the importing party according to the contract. For a small portion of the payment (i.e., lien money), at the request of the exporter, the importer applies to the bank to issue a lien payment guarantee letter.
Scope and purpose of application:
Applicable to the situation where the buyer or the contractor retains the balance payment in the later stage of contract execution, but the seller or contractor wants to withdraw the balance payment in advance;
For the buyer or contractor, it is guaranteed that the subsequent obligations of the contract will be fulfilled, achieving the same effect as withholding the balance;
For the seller or contractor, the balance is recovered in advance to alleviate the shortage of funds. , speed up capital turnover.
9. Leasing Guarantee
Standard definition:
A leasing guarantee refers to a letter issued by the bank to the lessor at the request of the lessee. A written document guaranteeing that a tenant will pay rent when due. According to the different leasing methods, it can be divided into financial lease guarantee and operating lease guarantee.
Scope and purpose of application:
Applicable to lease contracts;
For the lessor, it is guaranteed to recover the rent in a timely manner, which facilitates the execution of the lease contract. Execution;
For the lessee, it is helpful for the lessee to obtain the right to use the equipment as early as possible, obtain financing, and improve capital efficiency.
Note: Transferred from Guarantee.com Standard definition and purpose of bank guarantee - Guarantee.com