Payment / Supply Guarantee
The Payment Guarantee is used to alleviate the credit risk of repayment for the supplier. A Payment Guarantee provides the financial backing as surety for the borrower. The supplier would then know that should the borrower not be able to repay what he owes; the insurer will do so on behalf of the borrower.
Below is an example of the typical need and workings of a Payment Guarantee.
Let’s assume you are a contractor and find yourself in a growth phase. You win a construction project with a value that is a fair bit more than your average project. You now find yourself requiring 50% more material and your current supplier is unwilling to increase your account by the additional amount to cater for your extra material demand.
You then ask the supplier if he will accept a Payment Guarantee to provide surety that the money will be paid back according to the debt agreement. The guarantee needs to be backed by liquid assets and since you need the cashflow and cannot put aside the liquid assets yourself, you ask an insurer to be the Guarantor on the payment guarantee using its liquid assets.
The Guarantee will provide that, if you do not honour the debt agreement, the supplier may, in accordance with the guarantee, insist that the insurer honour the debt agreement. The Guarantor (the insurer) will then pay out the guarantee to settle your debt.
There is an upfront premium and collateral requirement needed before the Payment Guarantee can be issued.
Remember this is not insurance and should your supplier call on the Payment Guarantee, the Insurer may claim what it paid to your supplier back from you.