Surety Bonds
Providing Guarantees without tying up vital cash flow
What are Surety Bonds?
A Surety Bond is a contract between three parties—the principal (you), the surety and the obligee (the entity requiring the bond)—in which the surety financially guarantees to an obligee that the principal will act in accordance with the terms established by the bond.
To put it simply, they guarantee that specific tasks are fulfilled. This is achieved by bringing three parties together in a mutual, legally binding contract.
The obligee can make a claim to recover losses if the principal does fail to fulfil the task. If the claim is valid, the insurance company will pay reparation that cannot exceed the bond amount. The underwriters will then expect the principal to reimburse them for any claims paid.
Why Surety Bonds?
Cash-Flow
The Surety Market will not normally require any tangible security when issuing a Bond. Whilst by comparison, a Bank will need funds to at least to the value of the Bond value required. This can tie up vital cash flow headroom.
Off-Balance Sheet
Where a Bank issued Bond will be classed as a current liability, Surety Bonds are classed as a contingent liability and so are not shown in the same way. This will increase your net current assets value.
Types of Surety Bond
Performance or Contract Bonds
A contract bond is a guarantee issued by an insurance company in support of an underlying contract. The parties to a contract bond are the contractor, the employer (such as a main contractor or public body) and the guarantor – the insurer.
Road and Sewer Bond
Road and sewer bonds provide a guarantee on behalf of a property developer or house builder that they will complete the roads and sewers to the required standard and within a defined time-frame to enable them to be adopted by the appropriate authority under the relevant acts.
Deferred Consideration Bond
A landowner may be willing to sell land to a house builder or property developer on deferred payment terms. To give the landowner comfort, a deferred consideration bond can be arranged that will guarantee payment of instalments in the event that the house builder or developer defaults.