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Types of Guarantees

A Bank Guarantee is a versatile tool which can function as a number of instruments: a bid bond, a performance bond, and advanced payment guarantee, a warranty bond, a letter of indemnity, a payment guarantee, a rental guarantee, or a confirmed payment order.

1. A bid bond is usually issued for bidders on construction or similar tender based projects. A bid bond is a debt secured by a bidder. In effect, it serves to secure the bidder's investment in the project and to discourage bidding by less serious players. A bank guarantee could be presented as a partial alternative to the financial capital typically required by a project owner.

2. A performance bond, or contract bond is utilized in the real estate industry to make sure a contractor completes a designated project. A performance bond is issued by a bank, insurance company or a financial institution in favor of a beneficiary by order of an applicant, against the applicant’s failure to meet its obligations as per an underlying contract. A performance bond often covers 100% of the contract value and can replace a bid bond when the applicant has been awarded a contract. If effect, applicants use performance bonds to comfort suppliers who are concerned with the prospect that the applicant might become insolvent or otherwise unable to fulfill his contractual obligations. In case of insolvency of the applicant, the beneficiary receives compensation that should ease financial stresses or other damages caused by the contractor.

3. An advance payment guarantee, or advanced payment bond is an agreement where an issuer undertakes responsibility to return an advanced payment to the buyer, should the seller fail to meet his obligations.

4. A warranty bond is a contract between a project/property owner, a contractor, and a surety company. The bond promises that any defects found in the original project will be repaired during the warranty period. Frequently used in the housing and construction sector, a warranty bond guarantees an investor that a contractor will resolve all covenants that relate to materials used and work done before the warranty on the materials expires.

5. A letter of indemnity is an instrument guaranteeing contractual provisions will be met; otherwise financial reparations will be made. A letter of indemnity is often utilized to request replacements for lost shares from a company's treasury.

6. A payment guarantee provides the supplier with financial security in case the applicant fails to pay for goods or services supplied. Payment guarantees mitigate credit or country risk when the supplier ships the goods on an open account basis, which is to say, before receiving payment. Payment guarantees are typically issued to cover debts in cases of non-payment arising under a transaction or over a period of time. The instrument's wording is based on the terms outlined in the original debt agreement between the applicant and the beneficiary. The applicant will make a repayment based on these terms. Sometimes a payment guarantee can be backed with collateral, such as property or asset that is pre-approved by the lender.

7. Rental guarantees promise payment to a landlord in case a tenant defaults financially. Since the risk of a tenant defaulting can be extremely harmful to a property owner, rental guarantees are extremely valuable tools which give security to industrial and commercial landlords.

8. A confirmed payment order is an irrevocable obligation to pay. In most cases, the confirmed payment order is conditional on successful completion of a project.

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