Warranty bonds provide a competitive advantage and keep your cash flow intact

Warranty bonds

Do you do business internationally? In that case, you may be asked to provide a warranty bond, both in the public and private sectors. With warranty bonds, you assure that you will pay, and you retain access to your cash flow. This enables you to close attractive deals with new parties. These are often deals involving large sums of money. Even a complicated project thus becomes feasible. People almost immediately talked about bank warranty bonds in the past, but nowadays, there are many alternatives on the market, mainly through insurers. They do not charge the warranty bonds to a credit facility and are often cheaper. And that offers opportunities. Warranty bonds give you a competitive advantage while keeping your cash flow uncompromised.

What is a warranty bond?

What is a warranty bond? A warranty bond means that someone assures that a particular action will take place. This could be a payment or the fulfillment of a contractual obligation. A warranty bond can be made within 24 hours.

In the past, bank warranty bonds were usually considered. Today, there is a wide range of alternatives in addition to the traditional bank warranty bonds. In this article, you can read how this development came about.

What are the advantages of warranty bonds through insurers?

Forms of warranty bonds

There are also several options in diversity with respect to warranty bonds. The most common forms are:

  • Offer/tender warranty bond
    A bid or tender warranty bond provides the client with clarity on the quality of the bidders.
  • Prepayment warranty bond
    A prepayment warranty bond warrants the repayment of prepaid funds if the supplier fails to meet its contractual obligations. A contract for the supply of capital goods generally includes a payment schedule. This may be 30% upon acceptance of the order, 50% at a particular milestone, and 20% upon the project/good delivery. The so-called 30% down payment is intended to allow the contractor of the contract to purchase the required materials. This represents a risk for the buyer. You can cover this risk by asking for a prepayment warranty bond.
  • Performance warranty bond
    A performance pledge ensures that the construction work takes place as agreed in the contract. As the client, you are covered against the possible inability of the (sub)contractor to meet his obligations (e.g., due to insolvency). You can use the payment from the warranty bond to ensure that another contractor completes the construction. As described with the advance payment warranty bond, several partial payments are made. The performance warranty bond includes checkpoints to ensure that everything is proceeding as agreed and carried out.
  • Maintenance warranty bond
    A maintenance warranty bond assures that the machine or project will meet the predetermined specifications and performance after delivery. If this is not the case, the contractor must solve the problem. With a maintenance warranty bond, you as well as the contractor are assured that this will also be done within a specific timeframe.
  • Customs warranty bond
    A customs warranty bond assures customs that the excise duty will be paid on excisable goods, such as alcohol.
  • Rental warranty bond
    A rental warranty bond is one of the most well-known forms of warranty bonds. This warranty bond secures the rental payment of real estate for a certain period of time. Setting a rental warranty bond is generally more difficult because the term is often as long as 5 to 10 years.

In the article ‘Financial guarantees through insurers: these are the opportunities‘, you can read about specific examples of the various forms of guarantee. You can also read about our tips for working with guarantees. This article details what you need to consider if you want to take out a guarantee.

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