An intermediary Seller should never give a performance bond on small deals. For example, lets say the shipment of goods is for 50, 000 dollars and there is a PB, or performance bond of 2 percent. We are going to show you why this is a trap.
A performance bond is appropriate for the supplier, in some cases, because a bond physically attaches to the supply of goods, but you as an intermediary sells the title. A performance bond is a surety against the fail of performance in a transaction.
Performance Bonds are not common today. The Performance Guarantee is more common in today's world of bulk commodities, but what is interesting they are not used for small deals of say, 50 thousand or even 100 thousand dollars.
Where a performance bond is called for, the more appropriate instrument for you, as the intermediary, is the Performance Guarantee.
How does the PB, performance guarantee stand up to the Stand by Letter of Credit. The Standby was invented for the purpose of the Performance Guarantee and the PB should only be used where the size of the deal dictates the necessity to use it. For example, a 2 percent performance bond on a 100,000 dollar transaction is just plain stupid. On a 2, 3, or 5 million dollar deal this may make more sense. However, you still have to protect yourself.
In the world of commodities and the endless deals which go on never even require a PB or PG. There are large bulk commodity deals which may require them often, but in most cases they will end up being the optional "non-deal breakers" where a buyer may want, but does not need.
You as the intermediary, trader, can negotiate around the PB or PG, and if necessary give a performance guarantee only under the MOST STRICT circumstances. You and the intermediary/trader has to realize the correct protocol of dealing with performance guarantees.
If you have a buyer requesting such specific terms, there is an excellent chance they might be "trapping" you, and not only in a case where they have the advantage, but where fraud comes into play. Please be advised that the terms are not proof of fraud, there are the signs of a skeptical buyer which can easily take your money. We will explain more below.
If a seller makes up the terms described above in the first place the he/she shouldn't be trading without more information where they are deliberately making a trap? What we stated above is a trap. He is why.
A buyer who is trustworthy, but may not be, and the buyer's creditworthiness and credit rating is meaningless in this industry. You must get through you head, that you have no idea of the buyer's disposition in the deal of great past performance. This is not indicative of future results. What that means are buyers with great reputation have done some incredulous things.
A performance bond is absolutely nothing to trigger a buyer where a buyer needs no proof of the claims requiring the bond payment to trigger the transaction. Most PB's are written to be payable upon first written demand. This is crazy, but the buyer can take a piece of paper and hand it to his banker, and get paid on the PB even though you are compliant through out the transaction. What the buyer did is write the fact you were not compliant to his/her banker.
This is where you get really screwed. If you put up to the buyer a 50 thousand dollar performance bond, 45 days before your buyer even gets around to putting up the letter of credit, (where the buyer promises to Telex a portion of the funds equal to the transaction), but ONLY after you put up the performance bond you are now in a trap. Why? The buyer decides not to Telex the funds? Here is the trap. You as the intermediary/trader believes they cannot draw on the bond? This is not true. The buyer will take on the bond and you are in the trap.
You will not be able to do anything about it. You can opt to not believe anything we are saying, but believe us, many newby traders have be defrauded this way. Every Broker or person trading believe Performance Bonds are secure. They are not!
All your buyer has to do is demand the performance bond under the pretense of "breach of contract." Once that happens the buyer can walk with the performance bond of 50,000 dollars and you will never hear from him again. You may asking yourself, how can this happen? So easily, especially in today's world of commodities? The answer, you do not have to "actually" be in breach of contract for a bank to allow the buyer to collect on the performance bond.
For more information please visit http://www.thejokerbrokers.com