The BBA is now integrated into UK Finance. Please go to www.ukfinance.org.uk for new content and updates from UK Finance.
Material published by BBA prior to 1st July 2017 is still available on this website.
From 1 July 2017, the finance and banking industry operating in the UK will be represented by a new trade association, UK Finance. It will represent around 300 firms in the UK providing credit, banking, markets and payment-related services. The new organisation will take on most of the activities previously carried out by the Asset Based Finance Association, the British Bankers’ Association, the Council of Mortgage Lenders, Financial Fraud Action UK, Payments UK and the UK Cards Association.x
Bonds and guarantees are a way banks underpin credit agreements between businesses and their investors. These products give a buyer the greater security of a financial guarantee if a seller does not meet their contractual obligations. If the seller fails to deliver the goods or services as described in the contract, the buyer can “call” the bond or guarantee and thereby receive financial compensation from the seller’s bank.
Different types of bonds and guarantees:
Designed to show a buyer that a company bidding for a contract is serious about fulfilling its terms. Failure to take up the contract results in a penalty for the amount of the bond – usually between 2 and 5 per cent of the contract value. Also known as Bid Bonds.
Advance Payment Guarantee
Protects buyers who have made an advance payment to a seller before the contract has been completed. It guarantees that the seller will refund any advance payments to the buyer if the goods or services are unsatisfactory.
Retention Money Guarantee
Enables the early release of funds that a buyer would otherwise withhold until the completion of any warranty period contained in the contract. It represents an obligation on the part of a bank to pay a specified sum in advance to the buyer if the supplier fails to meet its contractual obligations.
Guarantees that the goods or services supplied will be of the required standard. If not, a penalty of 10 per cent of the contract price – and sometimes more – is payable. This type of guarantee is often required while a tender guarantee is still in place, and may be issued in addition to an advance payment or retention guarantee.
Allows the payment of duty on imported goods to be deferred, guaranteeing HM Customs & Revenue that it will be paid. This lets a business import and distribute goods before the payment of customs and excise duty, freeing up cash flow.
Standby Letter of Credit
Normally used in the trading of perishable goods, Standby Letters of Credit protect sellers, guaranteeing payment for goods they have already delivered.
They are sometimes used in other countries for all forms of bonds and guarantee given the legal requirement.
What are the benefits of Bonds and Guarantees?
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