Bank guarantees, performance bonds, advance payment guarantees and escrow can all appear in conversations about commercial payment risk, but they are different mechanisms. GoEscrow does not issue bank guarantees, surety bonds or performance guarantees.
What problem are you trying to solve?
Before choosing a mechanism, identify the actual commercial risk. Is a buyer being asked to make a substantial advance payment? Does a supplier need confidence before committing resources? Does a principal require protection against contractual non-performance? Those are different problems and may require different instruments.
Bank guarantee
A bank guarantee is an undertaking issued by a bank under its own terms. It is not an escrow account and GoEscrow does not issue bank guarantees.
Performance bond or performance guarantee
Performance security is generally intended to address contractual performance risk. Escrow does not guarantee that a contractor or supplier will perform its obligations.
Advance payment guarantee or bond
An advance payment guarantee or bond may be requested where money is paid to a contractor or supplier before the corresponding goods or work are delivered. The commercial concern is the payer’s exposure after advancing money.
How escrow differs
Escrow can address a different part of the problem by separating funding from settlement. For an eligible transaction, money can be secured before it is later remitted to the payee in accordance with the transaction. That may reduce the need to make an unsecured direct advance in some commercial arrangements, but it does not reproduce the legal or credit characteristics of a guarantee or bond.
When should businesses consider the distinction?
- large supplier deposits;
- custom manufacturing or procurement;
- project or milestone payments;
- transactions involving an unfamiliar party;
- commercial arrangements where one side asks for substantial payment before delivery.
Do not substitute mechanisms blindly
If a contract, tender, financier, legislation or other party specifically requires a bank guarantee, bond or other security instrument, an escrow arrangement should not be represented as satisfying that requirement unless the relevant parties and advisers have established that it does.
Related GoEscrow information
Read Business Escrow in Australia, Upfront Payments and Deposits and Progress Payments and Staged Payments.
Product information
Review the Product Disclosure Statement, Financial Services Guide and Terms of Use.