- Banks can provide Surety Bonds but is it best to use them?
Banks can provide Surety Bonds but is it best to use them?
Surety Bonds can be sourced from your Bank but is it wise to use them, a bank is deemed a suitable Guarantor by many Employers when requesting a Surety Bond as part of a contract and often appear in ‘approved surety lists’. The contract could be for a Performance Bond or and Advanced Payment Bond and many people try their Bank first.
Are Banks risk adverse?
The answer to this is yes, all banks are cautious when signing a contractor to become the Guarantor of a legal contract. Surety Bonds are complex and as such a Bank will only act as the Guarantor if you are able to provide suitable security, Cash or Property for the full Bond amount with them till they are released from the obligations of the Bond which can be as long as 5 years with the average length of a Bond being 24 months to Making Good of Defects.
Banks will hold your collateral in Escrow and charge a fee for doing so, for very few companies is this an effective way to achieve a Bond. Tying up cash or assets for the duration of a contract could be detrimental or simply unachievable to many. In addition, the lack of knowledge within the Bank and the resources to handle a claim could be devastating to you should a call upon the Bond be made. Recently we have experienced Banks only wanting to support ‘On Demand Bonds’ the reason being is that if there is a call upon the Bond then the instructions are clear that the Guarantor shall pay over the full Bond amount without challenge. Banks would prefer this as they do not have the technical knowledge and specialist skills to negotiate or dispute a claim under an alternative wording such as an ABI Bond or one containing an Adjudicators Clause. The result is that your cash held by the Bank will be paid to the Employer and you will have virtually no way to recover it.
How can a specialist Surety market help?
Unlike Banks specialist Surety providers will take a more commercial approach to acting as a Guarantor, they will review the contract, the applicant and wording and assess the likelihood of default and propose a Bond fee for acting as Guarantor under the Bond. In addition, Surety markets will ask for some indemnity in return, but Cash is often a last resort. You can see more on Indemnities and their meanings in a previous article we posted: Will the Surety Market tighten in 2021? - Surety Bonds and Guarantees
The benefits of using a specialist Surety market over a Bank are obvious, firstly it will free up cash flow, by not asking for a cash collateral of the full Bond amount this will enable you to keep a better balance sheet and enable you to trade uninhibited. A specialist Surety market will also be able to offer advice on the proposed Bond Wording and also help you propose changes and even alternative wordings which are fair on all parties. In addition, should a claim be made on the Bond a Surety provider will have an experienced team on hand to help negotiate the complex legalities ensuring any payment is fair and just.
We are able to cover a wide range of Bonds including;
- Performance Bonds
- Advanced Payment Bonds
- Retention Bonds
- Section Bonds
- Duty Deferment Bonds
- Rent Bonds
- Enviromental Bonds and many more.
Call our specialist team now to discuss your requirements 02476 017646