What is a surety bond?
A surety bond is a guarantee product in which an insurance company (the surety) provides assurance to an obligee that the principal will fulfil their contractual obligations.
The surety bond has gained rapid adoption in recent years as a modern alternative to bank letters of guarantee. It can be used in place of the letter of guarantee required for public tenders, private-sector contracts and advance guarantees — without consuming your bank credit line.
How does a surety bond differ from a bank letter of guarantee?
Both products serve the same purpose: one party (the obligee) wants assurance that the other party (the principal) will fulfil their contractual obligations. But the delivery mechanism differs:
- Bank Letter of Guarantee: issued by a bank, consumes your credit limit, may require a cash deposit (blockage), carries an annual fee
- Surety Bond: issued by an insurance company, does not consume your credit limit, generally no blockage required, single one-off premium
Where is a surety bond used?
- Public tenders — bid bond, performance bond, advance payment bond
- Private-sector contracts — performance guarantee, advance guarantee
- VAT refund processes — the guarantee required from exporters in VAT refund applications
What types of surety bonds exist?
- Bid bond — required at the tendering stage
- Performance bond — activated upon contract signing; guarantees delivery
- Advance payment bond — guarantees that the advance paid by the project owner will be used as intended
- VAT refund bond — required from exporters in VAT refund applications; accelerates the refund process and eases cash flow
What is the advantage of surety bonds for SMEs?
Surety bonds are a game-changer especially for small and medium-sized enterprises. For these companies, the bank credit line is often also the source of working capital. If letters of guarantee erode that limit, there is no room left to finance core business operations.
A surety bond does not consume your bank credit limit — for SMEs this means significant cash-flow relief.
What determines the premium for a surety bond?
- Bond amount and term
- The company's financial standing (balance sheet, revenue, creditworthiness)
- Sector and type of work
- Bond type (performance bond, advance payment bond, etc.)
Do all public bodies accept surety bonds?
No. Not every public body accepts surety bonds. Before participating in a tender, it is essential to confirm whether the relevant authority accepts surety bonds. The insurer's rating and capital adequacy, and the claims process and payment conditions being clearly written are also of critical importance.
To assess the right surety structure for your business and obtain a policy on the best terms, let us arrange a consultation.