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.
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.
Also Read – ARE SURETY BONDS BETTER THAN BANK GUARANTEES?