Financial guarantees

The financial guarantee is triggered when one of the parties to the contract fails to meet its obligations, protecting the other party from any resulting loss. Insurance companies can also issue financial guarantees, known as insurance guarantees, which can protect both the buyer and the seller.

Financial guarantees must always reflect the underlying contract and should therefore be tailored to each case. Including the wording of the financial guarantee in the contract makes it easier to avoid subsequent disputes about its terms. Contact your bank for help drafting the wording of the financial guarantee. It is also important to know which country's laws govern the financial guarantee. Unless otherwise stated, the financial guarantee is governed by the laws of the issuer's home country.

• Payment guarantee
• Advance payment guarantee
• Performance guarantee (Performance Bond).

Payment guarantees protect you as a seller or exporter. They are normally issued by the buyer's bank, which is a local bank in the importing country. Payment guarantees ensure that you receive payment once you have fulfilled a specific obligation.

Before signing the contract or sending an order confirmation, check with the buyer which bank will provide the financial guarantee. You may wish to contact your own bank for help assessing the local bank's creditworthiness. If the bank is not acceptable, contact the buyer and ask them to arrange for another acceptable bank to provide the financial guarantee.

Payment guarantees are often used instead of letters of credit because they can be simpler, faster and less expensive to arrange, including for the delivery of services. One drawback of a payment guarantee is that, if a dispute arises between the buyer and seller, payment will only be made after legal proceedings. To avoid legal proceedings, you can agree on an 'on-demand guarantee (O/D)', which is payable upon first demand. The ICC has set out the rules for these guarantees in URDG 758. You should discuss these options, and what they involve, with your bank's trade finance team.

A bill of exchange guaranteed by an acceptable bank (Avalized Acceptance) is an alternative form of payment guarantee. Exporters are exposed to interest rate risk from the time the contract is signed until the bank finances the bill of exchange. You may be able to agree with your bank to cover this interest rate risk.

A contract guarantee provides security for the beneficiary. In other words, it protects the importer financially if the exporter is unable to fulfil an agreement. Some of the most common contract guarantees are:

A bid bond (tender guarantee) is issued in connection with a tender and assures the prospective buyer that the seller will honour its offer.

An Advance Payment Bond/Guarantee is issued before or in connection with the advance payment and guarantees that the seller will repay all or part of the amount if the delivery does not take place as agreed.

A performance bond is issued when you enter into a contract or before the goods are delivered. It ensures that the seller delivers the goods and/or completes the work as agreed in the contract.

Contract guarantees are usually provided by a bank, but in some cases they may also be provided by an insurance company.

Eksfin – Export Finance Norway is a government agency under the Ministry of Trade, Industry and Fisheries. It promotes Norwegian exports and value creation by providing financing through government-backed loans and financial guarantees to Norwegian and international companies and banks.

Eksfin's customers include Norwegian export companies and their subcontractors, international buyers of Norwegian goods and services, and Norwegian and international banks. They represent export industries across Norway and range from small businesses to large companies. Shipyards, shipping companies and maritime equipment suppliers, fisheries and aquaculture, and the energy sector are among the main customer groups.

Eksfin's services address five key needs: strengthening companies' liquidity, financing investments in Norway, financing purchases of Norwegian goods and services, providing financial guarantees for contracts, and protecting companies in an uncertain world.

Read more about Eksfin's services