When a business plans to participate in public tenders or major projects, it must determine where to obtain the required surety bonds.
For many years, banks dominated the surety bond space. Today, however, insurance companies offer an innovative alternative that opens new horizons for businesses looking to grow without sacrificing their liquidity.
Choosing between bank guarantees and insurance-backed surety bonds can significantly impact a company’s growth, liquidity, and competitiveness.
The Basic Similarities
Before considering the differences, it is important to note the similarities. Both bank and insurance company surety bonds are tripartite agreements involving the principal (the business), the guarantor (the bank or insurer), and the beneficiary (typically the government or project owner).
In both cases, the purpose is to assure the beneficiary that if the principal does not meet contractual obligations, the bond amount will be paid. Both types are legally valid and accepted in public tenders and projects, provided the issuer meets credibility requirements.
Surety bonds, regardless of issuer, serve the same functions: bid bonds, performance bonds, advance payment bonds, maintenance bonds, and specialized bonds for customs and the Energy Regulatory Authority. The key difference is how obtaining them affects the business.
Bank vs Insurance: The Critical Game-Changing Differences
Capital Commitment: The Deciding Factor
The primary difference is capital commitment. Banks usually require businesses to deposit the bond amount into a term deposit or provide collateral, such as a mortgage over property. For example, a €200,000 surety bond would require the business to reserve that amount with the bank for the duration of the guarantee period.
In contrast, insurance-backed surety bonds do not require capital commitment. The business pays a premium based on the bond amount, type, and duration, retaining full access to its capital. In the previous example, the €200,000 remains available for business needs such as equipment purchases, supplier payments, or additional tenders.
Cost: Beyond the Numbers
While bank guarantees may seem less expensive initially, insurance-backed surety bonds can have slightly higher direct costs. However, a simple cost comparison does not reflect the full picture.
The true cost of a bank guarantee includes the opportunity cost of committed capital. For example, tying up €200,000 for a year prevents the business from investing in activities that could generate significant returns.
Speed and Flexibility
Bank approval processes can delay the issuance of surety bonds, especially when collateral is required. This process may take several days or weeks, potentially jeopardizing participation in tenders with strict deadlines.
Insurance companies typically issue surety bonds more quickly. After the initial assessment, subsequent bonds can be provided within 24 hours, which can be critical in a competitive environment.
Capacity for Multiple Projects
An often-overlooked factor is the ability to manage multiple projects simultaneously. Relying solely on bank guarantees limits participation in tenders to the amount of capital available for commitment.
Insurance-backed surety bonds enable businesses to participate in multiple tenders and projects without affecting liquidity. This approach supports growth by increasing opportunities for project awards and revenue.
Requirements and Prerequisites
Banks primarily require collateral, such as available capital, property for mortgages, or other guarantees.
Insurance companies take a broader view, evaluating financial statements, industry experience, project history, and resources. Typically, the business must have at least three years of operations, two years of audited financials, profitability, and positive equity.
When to Choose Each Solution
Bank Guarantees are the better choice when:
- You have abundant liquidity that isn’t needed for other purposes.
- You already have favorable terms secured with your bank.
Insurance-Backed Surety Bonds are the ideal choice when:
- You want to participate in multiple tenders simultaneously.
- You’re in a growth and expansion phase.
- You need large guarantee amounts.
- You want to maintain liquidity for investments in equipment, personnel, or inventory.
The SoEasy Insurance Solution
SoEasy Insurance offers insurance-backed surety bond solutions that combine international credibility with local service. Through its partnership with Axeria IARD, a member of the Arch Capital Group with an A- rating from AM Best and an A+ rating from Standard & Poor’s, SoEasy ensures that each surety bond is internationally recognized.
The company offers a full range of surety bonds, including bid, performance, advance payment, maintenance, and specialized bonds for the Customs Authority and the Energy Regulatory Authority. SoEasy Insurance has issued bonds for organizations such as the Public Works Department, the Sewerage Board, and the Ministry of Education.
Key Takeaways
Choosing between bank guarantees and insurance-backed surety bonds is a strategic decision that influences a company’s growth. For businesses seeking expansion and multiple projects, insurance-backed surety bonds provide a clear advantage.
SoEasy Insurance can assist you in selecting the most suitable solution for your business needs.
For more information, visit the company’s website or contact a SoEasy Insurance specialist or an Insurance Intermediary from the company’s network.