As India’s economy continues to grow, the need for infrastructure and construction projects is increasing. Companies, especially startups and MSMEs, are eager to bid on government and private tenders to secure work and expand their businesses. However, bidding on projects requires an Earnest Money Deposit (EMD), which can be a significant financial burden for small companies. Bid Bonds have emerged as an alternative to traditional EMDs. They allow businesses to bid on tenders without tying up valuable working capital. In this blog, we will explore what Bid Bonds are, how they impact the cost of a bid, and why they are an amazing tool for startups and MSMEs.
What are Bid Bonds?
Bid Bonds are a type of surety bond that provides financial assurance to the project owner or client that the bidder will enter into the contract if awarded the project. Essentially, Bid Surety Bonds act as a guarantee that the bidder has the financial capacity to take up the project and complete the documentations. If the bidder fails to do so, the bond will pay the project owner or client a predetermined sum of money.
Bid Bonds are different from Performance Bonds, which are issued after the contract has been awarded to the bidder. Performance Bonds guarantee that the bidder will complete the project as per the terms and conditions mentioned in the contract. Bid Bonds are also different from Advance Payment Bonds, which are issued to guarantee the return of any advance payment made to the bidder.
What Impacts the Cost of a Bid Surety Bond?
The cost of a Bid Surety Bond is determined by several factors. These factors include the size of the project, the bidder’s financial strength, and the risk associated with the project. The premium for Bid Surety Bonds is usually a percentage of the contract amount, typically ranging from 0.5% to 3%. The premium may vary depending on the bidder’s creditworthiness, experience, and reputation. Additionally, macro economic factor also play a role in deciding the premium of a Bid Bond or any Surety Bond.
Bid Bonds Underwriting Criteria
The underwriting process for Bid Surety Bonds is rigorous and involves a thorough analysis of the bidder’s financial strength, credit history, and reputation. Equally important to note the 3C principal of Capital, Capacity and Character for Surety Bonds. The underwriting criteria for Bid Surety Bonds include:
- Financial Strength: The underwriter will evaluate the bidder’s financial statements, including balance sheets, income statements, and cash flow statements. The underwriter will assess the bidder’s liquidity, debt-to-equity ratio, and working capital.
- Credit History: The underwriter will review the bidder’s credit history to determine their creditworthiness. The underwriter will examine the bidder’s credit report, including their payment history, outstanding debt, and credit utilization.
- Reputation: The underwriter will evaluate the bidder’s reputation in the industry, including their experience, track record, and references. The underwriter will consider any legal disputes, bankruptcies, or other negative events that may impact the bidder’s ability to complete the project.
Finally, on full satisfaction subject to a ZERO RISK TOLERANCE POLICY, the underwriter may give a green signal.
The Benefits of Bid Surety Bonds over Traditional Payment Instruments
In India, EMDs are traditionally provided in the form of Bank Guarantees, Demand Drafts, or Fixed Deposits. However, Bid Surety Bonds offer several advantages over these traditional payment instruments.
- Bid Bonds provide the option to pay only a percentage of amount as premium to submit for EMD.
- Bid bonds expire automatically after a period of 90 days from Bid submission date or Project start date, whichever is earlier.
- Bid Bond Technology by Surety 007 can be issued online in 3 simple steps.
How Bid Surety Bonds can benefit startups and MSMEs
For startups and MSMEs, the bidding process can be challenging, as they may not have a long track record or a strong financial standing. This can make it difficult for them to provide the necessary Earnest Money Deposit (EMD). EMD is typically a percentage of the bid value. It is currently issued as a bank guarantee or demand draft. In such cases, Bid Surety Bonds can be an ideal solution, as they require a smaller financial commitment. Furthermore, they can be obtained more easily than bank guarantees or demand drafts.
To obtain a Bid Surety Bond, a company must provide certain information to the surety provider, such as details of the project being bid on, the value of the bid, and the company’s financial standing. The surety provider will then underwrite the bond based on this information. If satisfied, the underwriter will issue the bond. Once the bond is issued, the company can submit it as EMD to the agency issuing the tender.
The impact of Bid Surety Bonds on the Indian market
Bid Surety Bonds are already widely used in the western markets, with a loss ratio of only 11.2%. With the introduction of Surety Bonds in India in February 2022, many willing and serious companies can now bid for projects that they were previously unable to bid on due to financial constraints. The demand for them is growing exponentially in India. Surety 007 is one of the few, if not the only, companies in India that provide Surety Bond Technology.
According to a report by Allied Market Research, the global Surety Bond market was valued at $15.3 billion in 2019. It is projected to reach $28.9 billion by 2027, growing at a CAGR of 7.6% from 2020 to 2027. These numbers are a testament to the potential of Surety Bonds in transforming the working capital for companies in India. Moreover, bid Bonds are expected to play a significant role in this transformation.
Bid Surety Bonds are an excellent tool for companies bidding on government or private tenders, especially for startups and MSMEs. They are an easier and more affordable way to provide Earnest Money Deposits. They can help companies to bid on projects that they were previously unable to bid on due to financial constraints. Thus, it can be said that the introduction of Surety Bonds in India has brought a new and exciting opportunity for companies to participate in the bidding process and grow their business.
Surety 007 is at the forefront of this transformation, with its innovative use of technology to issue Surety Bonds completely online. Finally, with its robust underwriting mechanisms enabled through the use of advanced technology, Surety 007 is helping to shape the future of the Surety Bond market in India.