12th November 2024 - Surety Bonds: The Off-Balance Sheet Alternative to Bank Guarantees

Surety bonds issued by the surety market (as opposed to the banks) are contingent liabilities and are also known as off balance sheet lending.

Applying for a Performance Bond, Retention Bond or Advance Payment Bond is the equivalent of applying for a term loan with a bank or alternative finance provider.

Unlike Banks, Sureties typically rely on a Counter Indemnity as their security, rather than taking tangible security in the form of a charge over assets or cash.

Consequently, noting the levels of insolvency in Construction have been significantly above average since 2022, the level of due diligence required for a surety bond is commensurate with the proportionate risk.

You would happily provide all and any information for a debt raise with a bank and surety, as a form of credit is no different.

For those with past experience of surety bonds, they are used to an invasive process that has become iteratively more intrusive in recent years but remember the alternative is a bank guarantee requiring 100% cash collateral, which strips the business of much needed working capital.

Unlike the banks, the surety’s interests are aligned with yours. In our experience, the vast majority of companies benefit from the due diligence process.

In short, expect to be asked challenging questions on past, current and forecast performance both holistically and on a job by job basis when seeking surety bonding lines.