Winning a contract on an international project or sale often requires posting a bid bond or guarantee to compete for the deal and a performance bond or guarantee to ensure the winning bidder will see the contract through. The objective of both parties is to reach agreement on a commercial contract and assure that indemnification is provided for failure to abide the terms of the contract.
Types of Contract Bonds
There are normally three types of contract bonds issued to the foreign buyer to protect against breach of contract.
- Bid Bond: a guarantee assigned by the winning and accepted bidder to the foreign buyer if the exporter fails to enter into a commercial contract.
- Advance Payment: a guarantee that any advanced payments made by the foreign buyer will be repaid in the event the exporter fails to deliver the goods or services.
- Performance Bond: a guarantee to the foreign buyer of specified amount if the exporter fails to deliver goods or complete contractual works per the term of the commercial contract.
Coverage for Contract Bonds and Guarantees
An export credit agency will provide this cover to lendersto indemnify them for loss of making payment to a foreign buyer. The request for the contract bond or guarantee must be initiated by the exporter who requests his lender to issue the contract bond or guarantee. The lender in turn, will require that the exporter indemnify the lender for any payments made to the foreign buyer, often referred to as a counter-guarantee or counter-indemnity. Lenders are normally unwilling to take this risk on international sales due to the difficulty in collecting accounts receivable or taking physical possession of inventory or equipment in foreign jurisdictions.
This is where your export credit agency steps in covering the risk to the lender for any losses from failure of the exporter to pay. The lender is required to pay the foreign buyer and turn to the exporter for payment. If the exporter is unable to indemnify, then the lender is entitled to receive indemnification from the export credit agency. To claim indemnification the lender will assign a right to the export credit agency. The export credit agency will then seek payment from the exporter.
Want to Learn More …
There are many export credit agency but only one is yours - the Export-Import Bank of the United States (EXIM Bank) and we are here to help. EXIM’s Working Capital Loan Guarantees equip exporters to meet their foreign buyers’ needs for contract performance.
