There are many financial products that help a company advance. Two of these products, a surety bond and a letter of credit (LC), are essential part of the Import/Export industry. We will, through few simple points, explain how Surety Bonds are better than Letter of Credit

The pros and cons of one over the other will aid you in choosing the right tool for your business.

surety bond vs letter of credit

Are Surety Bonds better than Letter of credit for import bond? Surety007 explains how.

Surety Bonds vs Letter of credit (LC)

Firstly, both Surety Bonds and LCs provide financial protection as a promise of payment against a default by the payee.

Now, a LC is a promise by a bank to advance up to a certain amount of money to one deal party if the other party defaults.

Whereas, a surety bond is a guarantee in which an insurance company agrees to assume a defaulting party’s financial obligations.

Surety 007 suggests several benefits of using surety bonds over a LC, including:

1. Surety bonds don’t need COLLATERAL

Explicitly, a surety bond does not require collateral, unlike an LC. Consequently, you will not have to put up your personal assets or your working capital as collateral for the bond.

The funds deposited as margin money against the letter of credit get reserved. Thus, they are unavailable for use to the business as long as the LC is outstanding.

Surety Bonds do not block the working capital. Businesses only pay an annual premium to purchase the surety bond.

This aspect of surety bonds is a major advantage for cash-strapped businesses like import/export and construction.

2. Surety bonds DO NOT BLOCK the valuable LINE OF CREDIT

A surety bond is based on the financial solvency of a company.  It does not diminish the company’s borrowing capacity as issued by an insurance company. This is not true for a LC which diminishes the company’s line of credit. Moreover, a surety bond is based on the strength of your business, not your credit score.

3. Surety bonds are CUSTOMIZABLE

Surety bonds are customizable to fit your specific needs. The bond is tailored to your business requirements and your agreement with the buyer/seller.

4. Surety Bonds are CHEAPER

Surety Bonds are charged on pro-rata basis. You pay for the time period for which the Bond is utilized. In comparison, LCs are charged either quarterly or, in some cases, annually.


6 responses to “Are Surety Bonds better than letter of credit (LC)?”

  1. […] surety bonds & bank guarantees (or Letter of Credits/LCs) ensure that the principal satisfies his obligations to the obligee, failing which the obligee is […]

  2. […] surety bonds & bank guarantees (or Letter of Credits/LCs) ensure that the principal satisfies his obligations to the obligee, failing which the obligee is […]

  3. […] INR 2 Trillion (or 2 Lac crores) worth of Collateral Free Credit Guarantee announced, to made possible through Surety Bonds, Payment Guarantee or Advance Payment Guarantee Surety Bonds, by Insurance companies in India. Infusion of INR 9000 crores in Credit Guarantee Scheme for […]

  4. […] In India, the trade industry is also a significant contributor to the country’s economy. It accounts for around 11% of India’s GDP. The industry is dominated by the export of services, such as IT and business process outsourcing. However, the trade industry is also subject to risks such as non-payment, which can be mitigated through the …. […]

  5. […] One of the most common instruments used for this purpose is a Letter of Credit (LC). However, Surety Bonds for trade have emerged as a viable alternative to LCs. They offer several advantages for both buyers and […]

  6. […] age alternatives. The Government of India is leading the charge by advocating for the adoption of Trade Credit Insurance and Surety Bonds as viable replacements for LCs. Surety Seven (007), a pioneering company in India, is at the […]

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