They may be different strokes of a similar brush, but surety bonds offer compelling benefits as a form of security against contract default when compared to guarantees offered by banks.
Clearing up the misconceptions around surety bonds
But before we continue, it's important to clear up misconceptions about what surety (or contract performance) bonding is. When you have a team that has worked in the sector for years, you tend to hear it all – but here are the most frequent questions AssetInsure gets asked:
- Isn't surety the same as an insurance policy? Bonds are not subject to an 'insurance style' claims process, as they are not an insurance product. As an unconditional undertaking, there is no requirement to prove there has been a lack of performance as per contractual agreement or any justification needed for making the claim.
- Do surety bonds carry the same obligations as banking agreements? Yes, both of these security arrangements are payable on demand, and contracts have the same wording and legal obligations.
- Aren't surety claims more difficult to process than bank guarantees? Both contract performance bonds and bank guarantees have the same claims process. Bonds can be presented for claiming and the amount is paid within eight hours to a nominated account.
Now that you have the basics in place, let's take a look at the ways surety bonds are a smarter alternative to bank guarantees.
The benefits of surety bonds
Strong financial backing
Bank guarantees are backed by the strength of individual financial institutions. This differs between banks nationwide depending on each organisation's capital reserves and the general economic and business climate.
Assetinsure's, Swiss Re Bonds are backed by the financial strength of Swiss Re International SE, a subsidiary of Swiss Re International SE one of the world's leading provider of reinsurance and insurance (valued at AU$44 billion).
Many think this means that surety bond providers are not as financially strong as local Australian banks. But the figures don't lie – Swiss Re International SE has the same, if not better, Standard & Poor's credit rating (AA- stable outlook) as the big four banks in Australia. This strength means business that protect themselves with surety bonds are in truly safe hands.
Security and flexibility
When businesses approach a bank for a guarantee, they are required to put up security against their bank guarantee facility. This means organisations need to have significant capital reserves, property or cash to use as collateral – which can hamstring short-term cash flow or restrict growth opportunities.
Surety bonds (contract performance bonds) offer a smarter alternative to traditional secured bank guarantee facilities. This solution is designed to deliver a flexible and effective bonding program, operating alongside traditional banking lines of credit. The bond facility is unsecured, meaning applicants don't need any tangible form of financial security, such as property or cash.
The facility allows the company greater financial flexibility by allowing the company to leverage off its capital base and enhance liquidity opportunities. Organisations can retain much-needed cash to take advantage of commercial opportunities. This allows bonded enterprises an advantage over those which choose to use a bank guarantee.
Business leaders can also better utilise the company balance sheet. This reduces cases of lazy capital – inactive funds retained as a bank guarantee deposit unable to increase in value by more than its fixed interest. Surety bonds ensure you always have the cashflow to take financial opportunities as and when you need to.
AssetInsure offers contract performance bonds for a range of business needs – why not make the change today?