What is a Performance Guarantee? How does it differ from other Bank Guarantees?

Performance Guarantees and Financial Guarantees 

There are two types of Bank Guarantees, Performance Guarantees and Financial Guarantees. 

Performance Guarantees – This is a promise by the issuing bank to cover any losses the beneficiary may incur. These losses fall into the category of non-performance on a contract by the applicant. 

Financial Guarantees – This is a promise by the issuing bank to pay the beneficiary should the applicant default on payment. 

Please note the applicant is the provider of the Bank Guarantee. The issuing bank issues the Bank Guarantee. The beneficiary is the beneficiary of the Bank Guarantee. 

Examples of a Performance Guarantee 

Performance guarantees are used across the spectrum of the construction industry. They are there to guarantee compensation should there be delayed performance on a contract. 

This can be in the area of ship building such as container ships or cruise liners. Late delivery will cost the owners money. Construction projects such as hotels or housing projects are also covered by performance guarantees. 

Performance guarantees are also used in other markets. The late delivery of perishable goods is often covered by performance bonds. This will include such items as fresh flowers or fresh food. Late delivery can mean food that is past its sell by date or flowers beginning to wilt. This will inevitably lead to compensation. 

Performance Bond 

A performance bond is a term and instrument readily used to cover contract failure. It is issued to guarantee against failure of any obligations in a contract. So, is a performance bond different to a performance guarantee?  

Over the years these two instruments have become entwined. Phrases used in performance bonds can be found in performance guarantees. Conversely, phrases used in performance guarantees can be found in performance bonds. 

These two instruments are therefore very much related to each other. However there is one big difference. Under a Performance Guarantee the right to claim is linked to non-performance on the contract. Under a Performance Bond the bank has to pay on demand despite the underlying contract.  

To learn more about Bank Guarantees please read our information under Bank Guarantees, especially if you are a company looking to raise investment funds against a Bank Guarantee. All interested companies should also visit IntaCapital Swiss, Europe’s leading experts on how to raise cash against Bank Guarantees.