What is a surety guarantee?
The surety is the guarantee of the debts of one party by another. A surety is an organization or person that assumes the responsibility of paying the debt in case the debtor policy defaults or is unable to make the payments. The party that guarantees the debt is referred to as the surety, or as the guarantor.
How do you get a surety guarantee?
When companies need a guarantee, they often turn to their bank. And whilst this may seem to be the simplest approach, decision-makers should understand the other options available to them—mainly purchasing surety from an insurance company. One key reason? To free up liquidity.
When companies obtain a guarantee from an insurance company, they don’t use up any of the limits under their bank lines, giving them additional credit to use in other ways to support their business. Often, insurance companies have better credit ratings than banks, a key factor when getting clients to accept guarantees. Two examples of guarantees that can free up cash include pension bonds and payment services regulation bonds.
Pension guarantees ensure that a corporation’s pension scheme is being funded, whilst at the same time deferring the actual cash payments. When a business chooses an insurance company for this type of guarantee instead of a bank, it keeps its credit lines available with its bank and frees up the cash it may have had to put into the scheme, keeping cash in the business. Additionally, if the company becomes insolvent, the surety company will ensure appropriate payments into the scheme—maintaining the same protections for employees. Per recent legislation, directors could soon be liable if they take the appropriate steps to protect their employees’ pension plans.
Payment services regulation guarantees, similar to money transmitter bonds in the U.S., are needed primarily by financial and technology companies that process people’s money (e.g., PayPal, Worldpay). This type of guarantee allows any guaranteed funds to be exempt from the requirement to be ring-fenced from the companies’ cash, increasing the companies’ working capital and supporting their business. Similar to a pension bond, it also protects customers should the companies become insolvent and puts them in the same position as they would otherwise have been in.
In addition to enhancing liquidity, another reason companies should consider a guarantee from an insurance company is the spread of risk. Historically banks and insurance companies haven’t always been on the same economic cycle. Should there be a recession or the banking market is having trouble, an insurance company may not necessarily be experiencing the same challenges at the same time as the bank. Having a mix of bank and surety providers allows your business to grow.