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Surety bonds are financial instruments that are an alternative to traditional bank guarantees where there is a performance bonding guarantee requirement.
Surety bonds are financial instruments that are an alternative to traditional Bank Guarantees where there is a performance bonding guarantee requirement.
Surety bonds are provided by S&P A- to AA+ rated, APRA regulated, insurance companies which are comparable in financial strength rating to the Australian big four banks.
While bank guarantee facilities usually require security against assets, surety bonding is provided without tangible security and frees working capital.
Surety bonds are widely accepted in the Australian and global market-place by government, banking and commercial counter-parties.
Contract performance bonds
Advance payment bonds
Off-site material bonds
Maintenance bonds
Retention bonds
Importantly, surety bonding is not insurance and is provided on a full recourse basis to the bond issuer.
The facility underwriters use sophisticated credit evaluation techniques that take into account your ability to perform the contract in the first instance and secondly your ability to indemnify the surety in the event that the bond is called.
Above all else, relationships matter. That’s where our 14 years of experience adds the most value.
Contractor
Surety (Bond issuer)
Obligee (Principal)
Obligation
Contract
Contractor
Person 1
Indemnity
Principal
Person 3
Insurance Bond
Surety
Person 2
Obligation
Contract
Contractor
Person 1
Indemnity
Principal
Person 3
Insurance Bond
Surety
Person 2
In short, Bank Guarantees tie up working capital while surety bonding is provided without tangible security.
The bond underwriters offer sophisticated credit evaluation techniques that take into account your ability to perform the contract in the first instance and secondly your ability to indemnify the surety in the event that the bond is called.
Surety bonds are widely accepted in the Australian and global market place by government, banking and commercial counter parties.
Inscap is the only specialist broker with a financing (rather than insurance) background, allowing us to best structure your financial information for placement with the underwriters.
Additionally, Inscap will provide pre-bonding and ongoing advice including:
Inscap provides a complete end-to-end bonding service leaving you to focus on your business.
There are a large panel of bond issuers in Australia and each works slightly differently in their approach to the market. The appointment of an experienced and skilled broker can ensure your needs are being correctly represented in the market and to the most relevant underwriters.
At a high level the process and timeframe is illustrated below.
Identify need for bonding
1 week
Engage Inscap
2 weeks
Work with Inscap and underwriters to secure facility
3-4 weeks
Draw down on specific bond as required
1-2 days
Identify need for bonding
1 week
Engage InsCap
2 weeks
Work with InsCap and underwriters to secure facility
3-4 weeks
Draw down on specific bond as required
1-2 days
1 week
2 weeks
2–4 weeks
1–2 days
Establishment cost vary between nil and $10,000.00, depending on facility provider, plus any specific legal charges for establishing the facility.
There are no annual line charges on the facility.
Bond Fees range from 0.50% to 5.00% of the face value of the bond per annum. Inscap adds significant value at this point by working with the underwriters to identify the key risk items and the risk mitigation practices to reduce the premium.
More importantly, how much does it save on cost? The economics are defined by the value of available cash, or security, in your business. In most cases your weighted average cost of capital (the cost of using cash) will be far greater than the income earned while security funds are on deposit backing a bank guarantee. The table below compares the costs associated with bank guarantees and surety bond instruments:
| Bank Guarantee | Surety Bond | |||
| A | Bond face value | $5,000,000 | $5,000,000 | |
| B | Facility line fee | 0.75% | $37,500 | $nil |
| C | Issue fee (per annum) | 1.50% | 1.50% | |
| D = A x C | Issue cost | $75,000 | $75,000 | |
| E | Interest on cash backed deposit |
0.10% | $5,000 | $nil |
| F | Less WACC Cost (Base Rate = 175 points) |
2.00% | $100,000 | $nil |
| B + D - E + F | Cost of bond | $207,500 | $75,000 | |
| Effective cost | 4.15% | 1.50% | ||
| Annual saving by using surety bond |
$132,500 |
