Commercial transaction at home and abroad? Security is one of the deciding factors. Of course, you want to be paid on time for goods and services that you have supplied. If so, a payment bond is just what you need.
The risks assessed
You occasionally get to meet new clients a trade fairs or through a referral. If these business opportunities come from the far-flung corners of the world, you have to deal with both sides of the coin: you're glad at the chance to grow, but you'll also be turning a mind to the risks. After all, you barely know one another.
Some of the possible risks
- The buyer cancels the order
- The buyer can't pay after delivery
- The buyer pays in another currency
- The goods are damaged during shipping
But your client will also be dealing with these uncertainties. He also doesn't know who it is he's dealing with and will therefore be asking himself the same questions: what if the goods get damaged during shipment? Or what if the invoice is in another currency? The risk for both parties are clear
The best way to avoid risk is to ensure clear agreement. Classic examples are payment terms such as the invoice payment date, payment mpethod and currency. But the delivery terms should also be discussed up front.
If you want to rule out any possibility of default, it's best to work with a payment bond. This is a guarantee for the supplier or contractor that payment will in fact be made once the contract has been performed, within the set deadline and in the invoiced amount.
The constituent aspects of a payment bond
Usually, the bond is issued for 100% of the contract amount.
But the amount can depend on the payment instalment to be covered. In
the case of recurring supplies, an estimated average is taken for a
certain supply period.
If you want to arrange a payment bond for your trade transactions, your buyer has to apply to their bank.
Guarantees Two-way traffic
A payment bond offers you peace of mind and certainty. But your buyer also wants to be free from worry when he does business with you. In exchange for the payment bond, you can offer him a performance bond. That is a guarantee for the buyer that you will deliver in time and conform to contract.
And, if you want an advance before starting on a large project, you can offer your buyer an advance payment bond in exchange.
Of course, there are other bank guarantees that offer you and your trading partners greater payment and delivery certainty. For instance, there is a bid bond, a guarantee between contractor and the party letting the contract, where the party in breach pays compensation for failure to fulfil the contract.
To find out more about working with bank guarantees, see the KBC Guarantees product fact sheet or feel free to visit us and chat with your relationship manager. We're here to help you.