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Payment Guarantee - What is a Payment Guarantee?

Definition: Payment Guarantee provides the beneficiary with financial security should the applicant fail to make payment for the goods or services supplied.

Payment guarantees mitigate credit or country risk when selling on an open account basis. They are often used to cover the non-payment of debts arising under a transaction or over a period of time.

Such guarantees generally run up to the final scheduled date of payment, plus a grace period to allow the beneficiary to make demand in the event of non-payment.

Financial commitments

Payment guarantees are financial commitments that require the debtor to make a repayment based on the terms outlined in the original debt agreement. Sometimes the payment guarantee is backed with some kind of collateral, i.e. property or another type of asset that is accepted by the lender.

Different kinds of guarantees are used for different business settings, for example the working agreements between importers and exporters, or when suppliers of goods and services require guarantees from a parent company when working with subsidiaries.

Advance payment guarantees

Advance payment guarantees are one of the most common types of guarantees. They are often utilized during import-export transactions. An advance payment guarantee amount could be either a percentage (a prepayment) or the full price of the goods to be shipped.

Usually the payment is held on deposit at the seller’s bank until the order has been received and accepted by the buyer, at which point the payment is released to the seller. If the seller does not take steps to fulfil their contractual obligations, then the buyer can exercise the payment guarantee.