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What Is an Advance Payment Guarantee?

Businesses buying goods internationally often have a payment guarantee.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 30 September 2014
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An advance payment guarantee is a form of protection that makes it possible for a buyer to recover any advance payments extended to a seller in the event that the seller fails to abide by the terms and conditions that govern the purchase of goods or services. A guarantee of this type may be used in a number of situations, including deals where goods are imported or exported. It is also used with domestic transactions, such as the purchase of heavy equipment, construction projects, or even large lots of retail goods.

When a contract to purchase goods or services requires some sort of payment in advance, there are usually terms that protect the buyer in the event that the seller is unable to meet his or her obligations. For example, if the seller required an advance payment prior to shipping all or part of the order, and the seller subsequently fails to ship that order, the buyer can declare the deal null and void, and receive a refund of the advance payment. The advance payment guarantee ensures the buyer does not sustain a loss of any real money invested in the transaction, although it does not provide any recompense for any loss of income or profits that the buyer sustained when the goods were not shipped.

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The same general principal applies when a buyer engages a construction company to manage the construction of a building. Should the contractor fail to abide by the terms of the contractual agreement, the client can end the business relationship and recover any advance payment that had been made as part of the deal. Depending on local laws, the client may be required to pay for any services that were rendered, or the provider will be required to absorb those losses and issue a full refund of the advance.

Businesses that purchase goods from sellers located in other countries often take steps to ensure that an advance payment guarantee is included in the terms and provisions of any contracts established with those international suppliers. Close attention to the specifics of the guarantee is important, since it is possible to deny a repayment of the advance if circumstances beyond the control of the supplier made it impossible to comply with all provisions of the agreement. For example, if inclement weather prevented the delivery of the goods by the date specified, or if the goods were lost in transit due to a natural disaster, the guarantee may or may not apply. For this reason, it is important for buyers to make note of any conditions that are placed on the guarantee, and determine if those excluded conditions have a high probability of occurring.

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anon971860
Post 4

OK. So an advanced payment guarantee in terms of construction will be issued to the contractor so that the employer will release advanced monies from them in order to purchase good and materials.

Previously, they just released monies. Now they actually fit the bills.

That guarantee becomes null and void once the materials have been bought and are on site.

aviva
Post 3

@elizabeth23 - Yes there's some risk involved with buying and selling over the internet but most reputable sites offer buyer protection. Escrow or bank guarantees are usually recommended on the big auction sites to protect both parties involved. Freelance job sites do this as well.

bfree
Post 2

Payday lenders tend to work the same way. You give them a postdated check, usually 30 days out plus interest, in exchange for a cash loan. Your check is their guarantee of repayment. They're commonly used get you from one payday to the next so you must be employed in order to qualify.

elizabeth23
Post 1

Advance payment can be an issue in things like internet shopping, especially on auctioning sites. If you pay in advance and never get your product, that can be a problem; likewise, if you send your product before getting paid, you might never get the money. It is so much more complicated than simply going to a brick and mortar store, but then I guess it is more convenient in some ways, too.

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