Guarantees & surety
Advance Payment Guarantee
Lets a supplier take payment up front while giving the buyer recourse if the goods or works are never delivered. Reduces amortises as the contract is performed.
Boland’s Quay, Dublin · William Murphy, CC BY-SA 2.0
Who it is for
Manufacturers, equipment suppliers and engineering contractors
What it does
- Reducing balance as milestones are certified
- Expiry tied to delivery or to a fixed long-stop date
- Available in GBP, EUR and USD
- Counter-indemnity from the parent where the operating entity is thinly capitalised
The product in full
An advance payment guarantee unlocks a payment that would not otherwise be made. A buyer commissioning plant or a long lead-time fabrication is often asked to fund materials and mobilisation before anything is delivered. Handing over 20% of the contract value to a supplier that may never deliver is not a decision a treasury team makes lightly — unless the money is guaranteed back.
The guarantee gives the buyer recourse to an insurer for the unearned part of the advance. Its distinguishing feature is that it reduces: as milestones are certified, the amount at risk falls, and the guaranteed sum falls with it. A well-drafted reducing schedule means the buyer is covered for exactly what it has paid for and not yet received, and the supplier is not paying premium on exposure that has already been earned.
Because the money has already moved, these guarantees are almost always on demand. That makes the counter-indemnity central: we look at whether the supplier can perform, and at whether it could repay the advance if the contract collapsed halfway through.
Literature
Product literature is issued to appointed intermediaries. Ask your underwriter, or request it through the enquiry form.
- Advance payment guarantee wordingOn request
- Milestone certification scheduleOn request
How it works
What happens, in order
From the first enquiry to the point the cover, the contract or the facility is in place.
The contract fixes the advance and the milestones
The payment terms state the advance as a percentage of contract value, and the certification points at which it is treated as earned. Both go into the guarantee.
We agree the reduction schedule
Straight-line against delivery, or stepped against certified milestones. The schedule is written into the guarantee so no amendment is needed as the contract progresses.
The guarantee issues and the advance is released
The buyer pays the advance against the guarantee. We hold the counter-indemnity from the supplier and, ordinarily, from its parent.
It reduces, then expires
On delivery, or at the long-stop date in the wording, whichever the contract makes the trigger. Unclaimed guarantees are released on the buyer’s confirmation or on expiry.
The numbers
A worked example
Illustrative arithmetic, so the shape of the product is visible rather than described. Nothing here is a quotation or a projection.
A €1.5m order with a 20% advance
An Irish engineering firm takes a €1.5m order from an EEA manufacturer, with 20% — €300,000 — payable on order to fund materials. Delivery is 12 months out, and the buyer requires an on-demand advance payment guarantee for the full advance, reducing as three milestones are certified.
The applicant is satisfactory with some volatility, so management accounts are reviewed half-yearly and the parent counter-indemnifies.
- Bond value
- €300,000
- Term
- 12 months
- Indicative premium rate
- 1.50% p.a.
- Premium for the term
- €4,500
- Issuance and arrangement fee
- €500
- Total indicative cost
- €5,000
- Cost as a share of bond value
- 1.67% of bond value
How the rate is built
- Base rate — Advance Payment Guarantee1.20% p.a.
- Financial strength — Band 3 — satisfactory, with some volatility+15%
- Security — Parent or director counter-indemnity−10%
- Wording — On-demand — payable on written demand+15%
- Beneficiary — Corporate employer in Ireland, the UK or the EEA+5%
- Term — Up to 12 monthsNo adjustment
The premium is charged on the guaranteed amount at issue. Where a reduction schedule is written in, the exposure falls over the term but the premium is not rebated — which is why the schedule is agreed before issue rather than after.
What is actually guaranteed, month by month
The €300,000 advance against three certified milestones at months 4, 8 and 12.
View these figures as a table
| Guaranteed amount outstanding | |
|---|---|
| Issue | €300,000 |
| Month 4 | €200,000 |
| Month 8 | €100,000 |
| Month 12 | €0 |
Suitability
Where the Advance Payment Guarantee fits
The cases it answers, the cases it does not, and what an underwriter needs before quoting.
It is the right answer when
- The buyer will fund materials or mobilisation, but only against recourse to an insurer.
- The contract has certifiable milestones, so the exposure can be made to reduce.
- The supplier would rather not lodge cash with the buyer for a year.
Look at something else when
- The advance is really working capital with no delivery obligation behind it.
- The contract has no defined delivery date, so there is no long-stop to expire against.
- The buyer wants performance cover as well; that is a separate bond, priced separately.
What we need to quote
- 1.The contract or purchase order, with the payment and milestone terms.
- 2.Audited accounts, management figures and the order book.
- 3.The wording the buyer requires, and the currency of the advance.
Questions
What brokers ask us about this product
Why is this priced above a performance bond?
Because the money has already left the buyer. A performance bond covers the cost of finishing; an advance payment guarantee covers cash the supplier has spent. It is also usually on demand, which is an unconditional obligation.
Can it be issued in a currency other than the contract currency?
We issue in GBP, EUR and USD. The guarantee should be in the currency of the advance, otherwise a movement in the rate leaves the buyer under-covered.
Does the reduction happen automatically?
If the schedule is written into the guarantee, yes — no endorsement is needed. If it is not, every reduction is an amendment, with a fee, and the buyer has to agree each one.
Request information
Ask us about the Advance Payment Guarantee
The form reaches an underwriter in Dublin. If you are an intermediary, say so and we will route it to the broker desk.