EFIC UPDATE – It is common for a buyer to require a supplier to provide bonds (or guarantees) as part of a contract?

So what is a bond?

Put simply, a bond is a legal agreement for a person to make payment to another person. Usually a bond is issued by a financial institution such as a bank (the issuer) on behalf of a supplier in favour of a buyer (the beneficiary). In it the bank promises to pay the buyer a certain amount immediately on presentation of the bond. This is known as calling the bond. Most bonds are unconditional meaning that the buyer doesn’t have to give a reason for making a call.

Bonds are used to protect a buyer against losses they may suffer due to a supplier not meeting their responsibilities under the contract. They have a start date and an expiry date after which a call can no longer be made (though some bonds may expire on the occurrence of a particular event rather than on a certain date).

They are many different types of bonds but the following are the four most common.

Bid/Tender bonds

Bid or tender bonds are provided by potential suppliers as part of the tendering process. Putting a contract out to tender takes time and money and the buyer needs to know that the company tendering is committed and able to go ahead with the contract if they win the tender. If the successful tenderer fails to sign the contract the buyer will call the bond to cover the costs incurred in having to restart the tendering process.

Advance Payment bonds

These are given by a supplier receiving an advance payment or deposit from a buyer.  It provides the buyer with a means of recovering the advance payment if the supplier doesn’t fulfil their obligations under the contract for which the deposit is paid.

Performance bonds

Performance bonds are provided by a supplier to a buyer to cover the buyer against any losses they may incur if the supplier fails to perform their obligations under the contract. A performance bond may replace an expired advance payment bond or in some cases an advance payment bond may be converted into a performance bond.

Warranty/Retention bonds

These bonds provide a guarantee to a buyer that their supplier will resolve all warranty issues before the warranty runs out. If the supplier fails to meet any warranty obligations the buyer can call the bonds to cover the costs of having another person resolve any issues.

Getting Bonding Support

When you are asked by a buyer to provide bonds for a contract the first step is to talk to your bank. Banks will often require a deposit equal to the bond value or some other security.

If you are an exporter or a supplier in an export supply chain who needs to provide an advanced payment, performance or warranty bond and your bank is unable to provide the bond or requires security that you are unable to provide, Efic may be able to help in the same way they were able to assist Queensland company Fibre King.

Fibre King is an 88-year old engineering company that specialises in the design and manufacture of packaging machinery for the food and beverage, pharmaceutical, fresh produce and household goods industries.

Fibre King moved into manufacturing automated packaging in the 1950s and was one of the first Australian companies to offer packaging equipment that was designed and manufactured locally and had minimal downtime. Today Fibre King’s award-winning products are sold in Australia and overseas.

A high-profile contract

In February 2014, Fibre King was awarded a large contract from a major multinational company that is building two new factories in Dubai. The contract involved the supply and installation of seven case packing machines and end of line palletisers for use within the client’s coffee and culinary operations. Fibre King needed to provide advance payment bonds as security for upfront payments received.

While Fibre King’s bank, NAB, was supportive of this opportunity, Fibre King’s operating capital facility would have been reduced by an amount equivalent to the bond. As a result, NAB suggested Fibre King talk with Efic.

How Efic helped

Efic provided advance payment bonds directly to Fibre King’s client. By not tying up precious working capital, the advance payment bonds allowed Fibre King to target other projects with the same client, resulting in additional orders in Thailand and Malaysia.

To find out more about bonds and how they work visit Efic’s webpage by clicking on the following link “How does a bond work?”

To find out more about how Efic could help your business achieve export success in general, please phone on 1800 093 724 or visit www.efic.gov.au.