Factoring Companies Guidebook

Performance Bonds

Definition

The lodging of financial surety, usually with the Client's or customer's bank to guarantee the ongoing performance and ultimate fulfillment of a contract to agreed conditions which may include quality and time constraints.

Concerns

Such Performance Bonds usually relate to work of a contractual nature and can be indicators of warranties, guarantees, retentions, instillation and commissioning elements within invoices, subject to contract. Each of these elements adversely affects our ability to collect the full value of invoices until all the customers' conditions have been fulfilled.

If the Bond forms a monetary deposit held by the customer, or an agreed intermediary, non-fulfillment will result in the monies being used by the customer to complete the job in question. The situation is less onerous to us if the Bond has been provided by the Client's bank against alternative security. However if the Bond is insufficient to enable a customer to complete the task by sub-contracting it elsewhere, or the customer makes a claim against a guarantee, attempts may be made to claim these by way of offset against other outstanding invoices. The scale of the Bond may be such that any claim may force the company out of business (unless the Client has insurance cover) and lead us into collecting out in a gone concern, with the potential for offset against our security.

Identification

Make enquiries with the Client as to whether Performance Bonds are required to cover their work and the nature of the Bond.

Seek details of any insurance cover taken out by the Client to cover a Bond.

Review invoices and credit notes for signs of warranties, retentions etc. which may indicate the existence of Performance Bonds

Review both the Client's and customer's terms and conditions

Review the nature of the customer base, some examples follow:-

• City Councils
• ABTA
• IATA
• Construction
• Large capital based projects

Treatment

Ensure the client has taken adequate steps to have financial deposits or insurance cover the contingent liability.

A Bond of sufficient size and adequately covered, may make an invoice, very secure for us, in the unlikely event it is not subject to the usual contractual terms e.g. Guarantees, Warranties etc. These potential other encumbrances indicate the debt should not be assigned.

If such invoices are assigned, a reserve should be put in place to maintain our security.