Contingent Guarantee

AAA

DEFINITION of 'Contingent Guarantee'

A guarantee of payment made by a third party, known as the guarantor, to the seller or provider of a product or service in the event of non-payment by the buyer. Contingent guarantees are normally used when the suppliers do not have a relationship with their counterpart. The buyer pays a contingent guarantee fee to the guarantor, which is generally a large bank or financial institution.

INVESTOPEDIA EXPLAINS 'Contingent Guarantee'

Contingent guarantees are a common feature in international trade, especially when vendors conduct business with new customers in overseas markets. Note that a contingent guarantee differs from a letter of credit (LC), which is more commonly used in international trade. The former only comes into effect upon non-payment after a stipulated period by the buyer, whereas a letter of credit is payable by the bank as soon as the seller effects shipment and satisfies the terms of the LC.


Contingent guarantees are also used as a risk-mitigation tool for large projects in nations with a high degree of political or regulatory risk, as well as in certain income-oriented financial instruments.

RELATED TERMS
  1. Lien

    The legal right of a creditor to sell the collateral property ...
  2. Unsecured Creditor

    An individual or institution that lends money without obtaining ...
  3. Upstream Guarantee

    A contingent liability on a subsidiary's financial statements ...
  4. Contingent Asset

    An asset in which the possibility of an economic benefit depends ...
  5. Contingent Liability

    A potential obligation that may be incurred depending on the ...
  6. Creditor

    An entity (person or institution) that extends credit by giving ...
Related Articles
  1. What Is The Balance Of Payments?
    Economics

    What Is The Balance Of Payments?

  2. What Is International Trade?
    Personal Finance

    What Is International Trade?

  3. Different Needs, Different Loans
    Options & Futures

    Different Needs, Different Loans

  4. What's the difference between a bank ...
    Investing

    What's the difference between a bank ...

comments powered by Disqus
Hot Definitions
  1. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  2. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  3. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  4. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  5. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  6. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
Trading Center