A guarantee is an irrevocable undertaking issued by a guarantor (usually a bank) upon instructions of its customer (technically referred to as an applicant), to pay a named beneficiary any sum that may be demanded by that beneficiary up to a maximum amount determined in the guarantee. Guarantees are widely used in local and international trade to serve as contingent instruments to be called upon in the event of a failure to perform contractually agreed responsibilities.

Guarantees are the most flexible security instrument in International Trade. Barring the presence of any national laws enforcing pre-approved wordings, there are no restrictions as to how guarantees can be worded. Generally, the content of a guarantee is dependent on the agreement of the involved parties.

 There are different types of guarantees. These include tender or bid bonds, advanced payment guarantees, performance guarantees, and payment guarantees to mention a few. These are briefly discussed below: 

1. Tender or Bid Bonds: Tender or bid guarantees are required when an organization or the government invites companies to bid for contracts to deliver goods or execute projects. The purpose of this guarantee is to ensure that bidders if selected are capable and willing to proceed with the contract.

2. Advanced Payment Guarantees: Advanced payment guarantees are issued to back the payment of advances to a seller or in the case of an awarded contract, the advance paid to a successful bidder for the execution of a contract to ensure compensation if there is a failure to perform on contractually agreed responsibilities. 

3. Performance Guarantees: When a contract is awarded or agreement signed to supply goods, equipment or to undertake a project, the contract awarding institution or buyer as the case may be may require assurance that the delivered contract or supplied goods are up to the pre-agreed standard. In such an instance, a performance guarantee will be required to protect the buyer.

4. Payment Guarantees: Payment guarantees are issued to cover payment obligations. They apply to a wide range of business endeavors including obligations to settle counterparties for supplied goods or provided services, reimbursement of facilities, and payments of rent obligations under lease agreements to mention a few.

Guarantees can be issued as Standby Letters of Credit (under UCP 600 rules) or Demand Guarantees (under URDG 758 rules). Generally speaking, both offer similar protection in the event of contractual defaults but bear a few technical differences which often influence the choice of one over the other depending on the transaction being executed and what kind of protection the beneficiary of the guarantee requires.

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