Which provider suits you and how does a guarantee work?

Guarantees

Do you do business internationally? If so, you may well be asked, both in the public and private sectors, to provide a guarantee or surety bond. Guarantees give you the certainty that you will pay while keeping your cash flow available. This allows you to close nice deals with new parties. These are often deals involving large sums of money. Even a complicated project suddenly becomes feasible. Whereas previously bank guarantees were almost immediately mentioned, nowadays there are many alternatives on the market, mainly through insurers. They do not charge the guarantees to a credit facility and are often cheaper. And that opens up opportunities. Guarantees give you a competitive advantage and you keep your cash flow intact.

What is a guarantee?

What is a guarantee? A guarantee means that someone provides assurance that a certain action will take place. This could be a payment or the fulfilment of a contractual obligation. A guarantee can be made within 24 hours.

Previously, therefore, bank guarantees were particularly talked about. Nowadays, there is a wide range of alternatives to the traditional bank guarantee. Read in this item How this development came about.

What are the advantages of guarantees through insurers?

Forms of guarantees

There are also several options in terms of guarantees in diversity. The most common forms are:

Offer/subscription guarantee
A bid or tender guarantee provides the client with clarity on the quality of the bidders.
Prepayment guarantee
A prepayment guarantee guarantees the repayment of prepaid funds if the supplier fails to meet its contractual obligations. A contract for the supply of capital goods, for example, generally includes a payment schedule. This may be: 30% on acceptance of the order, 50% on a certain milestone and 20% on delivery of the project/good. The so-called down payment of 30% is intended to allow the contractor of the contract to purchase the required materials. This implies a risk for the buyer. You can hedge this risk by asking for a prepayment guarantee.
Performance guarantee
A performance guarantee ensures that the construction will take place as agreed in the contract. As the client, you are covered against the (sub)contractor's possible inability to fulfil its obligations (e.g. due to insolvency). You can use the payment of the guarantee to ensure that the construction is completed by another contractor. As described for advance payment guarantee, several partial payments take place. Checkpoints are included within the performance guarantee to ensure that everything is proceeding and being carried out as agreed.
Maintenance guarantee
A maintenance guarantee provides assurance that the machine or project will meet the pre-prescribed specifications and performance after delivery. If this is not the case, the contractor has to fix it. With a maintenance guarantee, you as the client are assured that this will be done within a certain time.
Customs guarantee
A customs guarantee guarantees customs that excise duty on excisable goods, such as alcohol, will be paid to them.
Rent guarantee
A rent guarantee is one of the most well-known forms of guarantee. This guarantee secures the rent payment of real estate for a certain period of time. Setting a rent guarantee is generally trickier because the term is often as long as 5 to 10 years.

In the article 'Financial guarantees through insurers: these are the opportunities' you can read about concrete examples of the different forms of guarantees. You can also read here about our tips for if you would like to work with guarantees. This article goes into detail on what you need to think about if you want to take out a guarantee.

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