A surety bond is a financial instrument designed to protect the parties involved in a contract. It indemnifies these parties against the risk of a broken or failed contract. A surety bond is a legally binding contract between three parties: the principal, the surety and the obligee.
A bank guarantee is also a financial instrument that provides payment security for parties entering into contracts together regarding the exchange of goods and services. In this case, the bank acts as a guarantor, liable to cover the remaining or full amount of debt on behalf of the borrower in the scenario that this borrower fails to pay or perform the actions stipulated in the terms and conditions of the contract.
When Are Surety Bonds Used?
Surety experts such as Rob Tolley know that these types of bonds can be used by corporations and governments to raise money and finance projects. Bonds are issued with a maturity (or end) date, which represents when the loan’s principal is due to be repaid by the owner of the bond. As a type of fixed income, security bonds are one of three asset classes, with the other two being equities and cash equivalents.
The Benefits of Surety Bonds
Typically, a surety bond offers greater protection regarding the underlying contract. Whereas bank guarantees provide little in the way of protection to the underlying contract’s bonded principal, a surety bond primarily takes the form of a conditional bond. The latter protects the conditions of the underlying contract due to the fact that any losses must be ascertained and established before the surety pays out on any damages.
Furthermore, obtaining a bank guarantee usually involves providing the bank with some sort of collateral, often in the form of cash or the reduction of overdrafts or other banking facilities. As an alternative, obtaining a surety bond necessitates providing a different form of security: a Deed of Counter Indemnity. This indemnity means that the surety guarantor has recourse to the bonded principal and a way to attempt to recover any losses in the event that the bonded principal becomes insolvent or the bond is called in. Surety bonds, in comparison to bank guarantees, also typically make for prompt and efficient claims settlements – take a look at the embedded PDF for more information about this.
