In the world of finance, there are terms that may seem very complicated. But little do people realize that some of their actions are considered an act in the financial world. One of these terms is the advance payment bond. For those of the working class, the term “advance payment” is a bit familiar, but they are more familiar with the term “cash advance”. It works the same way, but the processes involved are a little bit different. When employees ask for a cash advance, upon approval from their superior, they are given their salary in advance – days before the actual date of the salary is given to all employees. Advance payment can be referred to as advance, wherein a part of the due sum, according to contract, is received or paid in advance for the services or goods, while the balance will only follow up the delivery. The cash is used in a way that will procure the necessary items that will complete the service or goods that will be delivered.
But what are advance payment bonds? It is just like how advance payment works, but there is more to it. These advance payment bonds are not given right away. It will have to get the approval of the client. The advance payment is oftentimes referred to as down payment. If the client approves the idea to the supplier, a bond may be needed in order to protect the payment against the default committed by the contractor. Other names to this advance stage payment or advance payment guarantee. Normally, the advance payment bonds will be an on-demand bond, which means that the bondsman will pay the money that is set out immediately in the band immediately, without the preconditions that needs to be met. This is the opposite of the default bond, wherein the bondsman will only become liable in the event there is a breach of contract.
Advance payment bonds are highly used in construction projects, as mostly they are required for it at the time when the contractor makes a request for an advance payment that will make them meet the required costs for the startup project. They might be required before the actual construction starts. A fine example to this when the contractor needs to purchase either an equipment, materials or high-value plant that is needed for the project. The client will be protected by the bond when the situation arises where the contractor fails to meet the obligations he signed with the contractor. This is especially very important at a time when the contractor becomes unable to pay the debts they owe.
But who protects the contractor in the event he or she is unable to commit with the obligations signed with the contract? This is where the surety comes in. Also called as a guaranty, in which it involves one party that will assume the responsibility for the obligation of debt from the borrower, in this case the contractor, at the event the contractor defaults. They are expected to perform according to the terms written in the contract between the contractor and the client.