Types of guarantees

Below we make a brief reference to the main types of guarantees:

1. TENDER GUARANTEE

(also known as 'tender guarantee' or 'bid bond')

It is used to compete in the award of a contract for the supply of goods or the construction of public works in a foreign country when the latter requests a guarantee from the bidders. The purpose of the same is to guarantee that the bidders do not withdraw or modify their offer until the award of the contract. Otherwise, the beneficiary of the guarantee would be covered for the possible expenses incurred in the examination of the offers received.

The amount is usually up to 10% of the value of the offer and the usual period is limited to the expected date of the award, and may be extended if necessary (extension of the tender period).

Normally these guarantees are usually issued with the commitment that, if the contract is awarded, a performance or performance guarantee will be sent.

2. GUARANTEE OF COMPLIANCE / GUARANTEE OF OPERATION

(also known as 'performance bond')

This type of guarantee is intended to ensure payment to the buyer in the event that the seller fails to comply with its contractual obligations, either in form or in time. For this reason, it is possibly the most used type of guarantee in international trade.

Its amount is usually set at 10% of the contract value, although it can range between 5 and 20%.

Since its function is to ensure the interests of the buyer, so that he receives exactly what was contractually agreed, this type of guarantee can be complementary to the documentary credit, insofar as the latter ensures payment to the seller.

Its content can be well established with respect to the delivery of the merchandise according to the agreed conditions; or be extended to other conditions such as installation or repair during the warranty period.

3. MAINTENANCE GUARANTEE

(also known as 'service guarantee')

It is common that in the sale of machinery and capital goods, once the merchandise has been delivered, a period of time is established during which the supplier is responsible for its proper functioning. To cover this period, this type of guarantee is required.

4. DOWN PAYMENT / ADVANCE PAYMENT GUARANTEE

(also known as 'advance payment guarantee')

These guarantees arise in the event that the seller requests an advance payment from the buyer; In this way, the buyer is guaranteed the return of the advance amounts in the event that the seller does not comply with the contract.

They are issued before making the payment on account and their entry into force is subject to the moment in which the payment is made.

The amount of the guarantee coincides with that of the advance payment or on account.

5. PAYMENT GUARANTEE

(also known as 'payment guarantee')

In the event that payment guarantees are required for a sale of goods or provision of services, a payment guarantee will be required from the buyer.

The difference with the documentary credit is that while in the credit the payment takes place once the documents have been presented to the ordering bank, in the guarantee the payment will only have to be made if the conditions indicated in the contract to which it is made are not fulfilled reference said guarantee.

6. FUNDS RETENTION GUARANTEE

(also known as 'retention guarantee' or 'deduction guarantee')

A part of each payment made by the buyer is retained until the contract has been completed.

7. GUARANTEES BEFORE CUSTOMS AUTHORITIES OR COMMUNITY ORGANIZATIONS

These guarantees are used, within the European Union, as a "community transit guarantee". With it, the merchandise is allowed to transit through the different countries without the need for dispatch and liquidation of customs duties.

Thus, in cases where the merchandise comes from a country outside the EU and is destined for a member country, the import is not cleared upon entry into Community territory, but rather in the country of final destination.

Likewise, in the case of exports to a third foreign country, after its export clearance in the country of origin, it circulates freely through the common territory to its country of destination.

In cases where the merchandise and its transport have origin and destination countries belonging to the EU, the amount of the guarantee refers to the VAT Tax.

On the other hand, with "customs guarantee" we refer to that which is used in order to avoid the payment of import duties in cases in which a temporary importation of some good must be carried out, for example for its exhibition in a machinery fair. It is also required when there is a discrepancy between the customs services and the importer regarding the applicable tariff; or when clearing customs directly without the intervention of a customs agent.

8. STAND-BY DOCUMENTARY CREDIT

Its purpose is to guarantee the payment of an obligation of the payer in favor of the beneficiary for concepts, related or not to commercial operations. They are also called contingent loans.

The main difference with the documentary credits is that the Stand-by credits are only used (the exporter would present documents for collection) if the ordering party / importer fails to fulfill its obligations (it would be like executing a guarantee).

As documentation, a letter from the beneficiary/exporter is usually requested indicating that the ordering party/importer has failed to fulfill its obligations and a copy of the commercial documents that evidence the shipment of the goods.

They are equivalent to guarantees, and their main advantage over them is that they can be governed either by their own rules and uses for stand-by documentary credits (ISP98), or by the rules and uses for documentary credits (UCP600). This characteristic avoids interpretations and problems caused by the different legislations of the intervening countries.