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Advance Payment Guarantee

Introduction

A written document issued by Bank of China at the request of a customer to the owner of a contracted construction or the buyer of a sales deal, guaranteeing the applicant will fulfill the contractual obligations after the owner or the buyer makes advance payment.

Functions

Facilitate timely receipt of advance payment, as well as speed up capital turnover during project construction and preparation-of-goods period.

Features

1. Solve the problem of mutual mistrust between both parties of a transaction. With good reputation, Bank of China involves in the transaction and acts as a guarantor to promote smooth transaction by providing guarantee for the parties.

2. Guarantee fulfillment of contractual obligations.

3. Guarantee payment of contract price.

4. Indemnify the damaged party and penalize the defaulting party in case of breach of contract to avoid and reduce contract breaching activities, thus saving trouble and expenses arising from litigation or arbitration.

Charges

The advancement payment guarantee fees shall be charged based on the principles and rates determined in accordance with relevant rules of Bank of China; the fees for letter of guarantee in foreign currency shall be charged in the same way as for letter of guarantee in RMB.

Target Customers

1. Contractors involved in constructed projects;

2. Suppliers involved in material procurement projects;

3. Sellers involved in shipbuilding contracts.

Application Qualifications

1. The applicant shall hold a business license of legal person that has passed the annual inspection or other valid certificates which fully prove its legal operation and scope of business;

2. The applicant shall have a loan card;

3. The applicant shall have an account opening permit and open a settlement account with Bank of China;

4. The applicant shall have the qualification to engage in relevant business (such as qualification of contracting foreign projects, construction qualification of building enterprise, etc.);

5. The applicant shall have a credit line at Bank of China, or pay full margin, or full guarantee acceptable to Bank of China.

Process

I. Application for letter of guarantee

1. The applicant fills out an application form or a contract for issuance of a letter of guarantee;

2. The applicant pays margin or submit other counter-guarantee;

3. The applicant submits primary documents related to the contract;

4. The applicant submits other documents necessary for issuance of a letter of guarantee as required by Bank of China.

II. Examination and issuance of letter of guarantee

1. Bank of China examines the customer qualification, underlying transaction and relevant documents;

2. Bank of China confirms the customer's margin or credit line and other mortgages;

3. Bank of China examines the written application and form of letter of guarantee;

4. Bank of China issues the letter of guarantee.

Kind Reminder

1. Amendment to letter of guarantee: The clauses of the letter of guarantee can be amended on request of the guaranteed party and the beneficiary, such as extension of the validity period.

2. Payment/compensation against letter of guarantee: In case the beneficiary claims compensation within the validity period of the guarantee, the applicant should be notified in time. The payment should be made after the guaranteeing bank examines the claim documents and confirms the documents are in compliance with the claim clauses of the guarantee.

Case

Company A, a European ship owner, ordered a LNG vessel from Company B, a Chinese shipyard.

The huge value of the ship construction contract made it difficult for the shipyard to complete the construction with its own fund, and thus required the ship-owner to make advance payment at construction schedule node. But the ship-owner was worried that the shipyard, after receiving the advance payment, could put it in other use or could not deliver the vessel as per the contract requirements, so the shipyard required an acceptable guarantee from the shipyard. Then on application of the shipyard, Bank of China issued an advance payment guarantee, with which the shipyard received the advance payment of the contract and begun construction.

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