Spotlight: Surety Bonds - Surety guarantee, bank guarantee, or letters of credit – which should I use?

With cash and working capital management at the forefront of all firm’s minds in this current “age of uncertainty,” more companies are turning to insurance company-backed bonds and guarantees as a method of enhancing their overall credit facilities and managing their liquidity.

Fortunately, sureties guarantee to provide working capital efficient solutions without utilising existing credit lines with lenders. 

A surety bond guarantees that one party will fulfil its obligation to another party. Companies can use a surety guarantee almost anywhere they currently use a bank guarantee or letter of credit – the language is often indistinguishable. The obligations can be regulatory, required by a court, or reflect private business-to-business contracts or transactions. There are a multitude of bond types and almost every industry utilises them in some fashion.

For example, on construction and engineering contracts a performance bond provides protection against a contractor default, resulting in a failure to complete a project on time and within contract specifications. Regulatory bonds may allow a business to obtain the release cash held on behalf of others that would otherwise need to be ring-fenced.

Payment services guarantees

Under EU and UK regulations, payment services guarantees can allow financial and technology firms handling other peoples’ cash to release it from escrow and utilise for working capital purposes. In the booming renewables sector, guarantees can be used either to guarantee contractual performance or for many regulatory purposes, such as when required to guarantee connection to the grid.

In the UK and across Europe, companies can choose to support these obligations with a guarantee from an insurance company, a bank, or in the form of a letter of credit. The biggest benefit to choosing an insurance company is that an insurance guarantee diversifies a company’s credit options and reduces usage of existing bank credit lines (as well as potential cost savings in an era of rising interest rates).

Additionally, an insurance company’s guarantee underwriter can often provide a good risk management perspective on projects or any other risks which might occur in the underlying contract or obligation.

Guarantee providers like Liberty Mutual Surety generally also offer greater capacity, meaning bigger bonds, if you need them. That’s because surety bonds are not credited against a company’s bank line, whereas a letter of credit limits a company’s credit capacity.

When companies choose insurance providers, they build long-term relationships with its underwriters who are responsive and experienced. These underwriters understand their local and international markets and, because they are part of a financially strong global company with global operations, they can also issue bonds in several countries, something banks may have a harder time doing.

Sponsored