Using performance bonds
Beware of the buyer
The global financial crisis saw a number of performance bonds being called, hence the need to keep an eye on the buyer as well as the exporter, says Govaert. “In the recent GFC, it’s the buyer that’s the problem. Calling on a bond is a perfect mechanism to get access to cash because we have to pay on demand, with no chance to dispute it. Only later on we can take action.”
If a bond is called unfairly, this puts pressure on the exporter, which still has to pay the money back to the provider while their institution takes action against the overseas buyer. Govaert says it’s sometimes difficult to know whether a bond has been called correctly, which is why having a good relationship with both the exporter and buyer is important: “You can resolve or preview these issues before they become a problem. You want the buyer and the exporter to continue to have faith in each other that they will deliver.”
Another consideration is the buyer’s country; while some are more risky than others, which generally means a higher cost of the bonding facility, each also has their own quirks of which you need to be aware.
“There are some countries that only accept local bonds and you need a local bank to issue the bond,” says Govaert by way of example. “Then there is the American situation where you can have bonds that don’t have an expiry date, which can be a real hurdle for some financial institutions. It’s still doable, but if an exporter tenders for a contract and needs a performance bond, it’s very wise to speak to a specialist to make it a workable instrument for the exporter as well as the buyer and financier.”
Case Study: Park Assist
Can’t find a parking space? Park Assist has built its entire business on helping drivers find a legal spot to pull up. The business provides parking management systems that guide drivers to spare spaces, as well as help with parking enforcement.
Park Assist recently won a contract with the City of Seattle in the USA, but with the new customer came the requirement for a performance (surety) bond, which “came with a number of challenges,” says Richard Joffe, president of Park Assist.
Usually priced at five-to-15 percent of the contract value in most countries, US bonds tend to be between 50-100 percent, he explains. And with a less than five-year track record in the country, it was difficult to have local banks front up the money in time to seal the deal. Park Assist approached the Export Finance and Insurance Corporation (EFIC), who dealt with Liberty Mutual in the US, to provide the US$780,000 bond. “Without the bond, we would have been forced to leave 100 percent of the contract value as cash security, which is money better used to grow our business, given the enormous demand we are seeing for our products,” says Joffe. “Bonding through EFIC is a tremendous resource if a bond is a requirement and working capital is a sensitive issue for your business.”
Park Assist is scheduled to complete the Seattle project later this year.
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