Surety Bonds are a real alternative to Bank Guarantees and Cash Retentions and not an insurance product. They are an effective way of managing your cash flow and unlike bank Guarantees do not tie up working capital or other assets.
Surety providers (insurers) underwrite the risk presented to them in a similar way to a banking facility, however, the surety facility can be unsecured and is based on the insurers calculated risk of your ability to meet contractual obligations. A facility rate (usually between 1.5% and 4%) is then set and the cost of a surety bond is then calculated based on this rate, the bond value and the bond period. The facility rate is reviewed annually.
Surety Bonds remain 'live' until returned and identical to Bank Guarantees, they are payable upon demand.
Surety Bonds most commonly sought are:
Advance Payment Bonds; and
Off-site Material Bonds.
These bonds are widely accepted by contractors; principals and government departments.
Naturally, as Surety facilities are underwritten on risk, to be considered there are minimum requirements including:
good business practices and management team in place;
continuous Profitability (3 years);
average turnover of $20M (3 years);
operating 3 years;
net tangible worth of $1M; and
positive cash flow.
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