Surety Bonds
A Surety bond, also known as a ‘surety guarantee’ is a promise to pay on the part of a third party, the surety, to a contractual party where another contractual party has failed to fulfil its obligations under the contract. This will normally be due to the default or insolvency of the party that has failed to fulfil its contractual obligations.
What is Surety?
Surety provides a promise to pay in circumstances where one contracting party fails to fulfil its contractual obligations to another. In a typical contracting situation three parties are involved: the principal, the obligee, and the surety company.
- The principal is who obtains the surety bond to guarantee a contract is fulfilled, or to comply with various legal requirements.
- The obligee is the party who requires a surety bond to protect against potential loss.
- The surety company, often an insurance company, provides the surety bond to the principal, acting as a guarantor in the event that the principal fails to fulfil its contractual obligations.
Organisations may be required to issue various performance guarantees. It’s common practice to use bank guarantees or letters of credit for this. We can replace these with an unsecured surety solution which does not tie up any corresponding funds and unlocks working capital.
An example would be where an employer on a construction project seeks a bond from the main contractor to cover the costs of replacing the main contractor in the event that they fail to fulfil their obligations under contract. They are typically called in when a contractor has defaulted or gone into insolvency.
Benefits of Surety
- Provides a suitable alternative to a bank solution without tying up valuable banking lines in the process.
- Surety is typically unsecured.
- On occasion, a surety solution can provide more protection to a company than a typical on-demand bank guarantee.
- Sometimes surety is also a cheaper option than a bank solution.