APBs are widely used in a number of industries including the Construction Industry. In the case of a construction project, the contractor (in this instance, the Principal) may request an advanced payment prior to the project commencing in order to purchase high value plant or materials that are specifically required for the project.

The client may make an advance payment on the premise of an Advance Payment Bond being supplied to secure said client in the event that the contractor fails to fulfil its contractual obligations, for example if the contractor becomes insolvent.

Typically, the amount of the bond equals the sum advanced.
An Advance Payment Bond will normally be an On-Demand Bond, meaning that if requested in writing, the bond will immediately be paid out in full without any preconditions having to be met.

This is as opposed to a Conditional Bond (or default bond) which requires that the client (the Obligee) meets certain conditions before the bond will be paid out.

This normally means that the client has to provide evidence that the contractor (the Principal) did not meet their obligations and fulfil the contract, and that they have therefore suffered losses.

Advance Payment Bonds must be very carefully drafted to set out the circumstances for payment and to make clear that they are On-Demand Bonds. They are best provided by a surety as opposed to a bank as they can ordinarily be delivered on an unsecured basis as they do not infringe on working capital.