In some cases, there may be an opportunity to consider a bond in lieu of a letter of credit from a bank. Such cases may involve international obligations, performance obligations, or paid loss retro programs — to name a few — which typically require some form of collateral. In those instances, a bond may be an attractive alternative to a letter of credit. Unlike letters of credit, surety bonds are not typically listed as contingent liabilities within financial statements. Surety bonds provide additional advantages not afforded by letters of credit, including:
- Greater credit capacity— Surety bonds are not credited against a company’s bank line, whereas a letter of credit limits a company’s credit capacity.
- Stronger default defense— Sureties investigate to find proof of default, whereas letters of credit may be drawn upon at any time.
- Experienced claims handling— Unlike most banks, sureties maintain claims specialists and legal teams, which handle disputes and assist with the claims process.
- Stable and transparent rates— Surety rates generally remain upfront and steady, whereas letters of credit often include additional costs such as commitment, utilization, and issuance fees.
- Enhanced security— Sureties generally require only a receipt of signed indemnity agreements to issue a bond, whereas banks can opt to take a security interest in the company’s assets as a condition of issuing a letter of credit.
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