Winning a public tender or fulfilling a large contract in Turkey almost always requires your company to provide a financial guarantee to the project owner. Traditionally, Turkish businesses have turned to their banks to supply these guarantees in the form of letters of guarantee (teminat mektubu). A surety bond — issued by a licensed insurance company rather than a bank — offers an alternative route that can materially improve a company's liquidity position. This guide explains how surety bonds work, what types are available in Turkey, how they compare with bank guarantees, and what to look for when placing cover.

The Three-Party Structure of a Surety Bond

A surety bond is a three-party contract that creates a financial guarantee. Understanding who each party is — and what their obligations are — is the foundation for everything that follows.

The critical distinction from other forms of guarantee is the right of subrogation. When a surety pays out on a claim, it acquires the legal right to recover that payment from the principal. A surety bond is not insurance in the conventional sense — the surety expects to be indemnified by the principal for any amounts paid. This makes the underwriting process more akin to a credit assessment than a pure risk transfer.

Types of Surety Bond Available in Turkey

Turkish public procurement law (Kamu İhale Kanunu, Law No. 4734) and associated regulations recognise several categories of guarantee. Insurance-backed surety bonds are accepted across all of these types, provided the issuing insurer is licensed by SEDDK and the bond form meets the authority's requirements.

Bid Bond (Geçici Teminat)

Required at the tender stage, a bid bond guarantees that the winning bidder will enter into the contract and provide the required performance security. Typically set at 3% of the bid value, bid bonds lapse once the contract is signed and a performance bond is in place. They protect the obligee from a contractor who wins a tender and then withdraws.

Performance Bond (Kesin Teminat)

Once a contract is awarded, a performance bond replaces the bid bond. It guarantees that the principal will complete the works or supply the goods or services in accordance with the contract terms. The standard rate under Turkish procurement rules is 6% of the contract value, though some authorities may require more for complex or high-risk projects. Performance bonds remain in force until the project is accepted.

Advance-Payment Bond

Many public contracts include a mobilisation advance — a payment made to the contractor at the outset to fund initial costs. An advance-payment bond secures the repayment of this amount if the contractor fails to deliver. The bond amount typically reduces pro rata as advance payments are recouped through progress certificates.

VAT Refund Bond (KDV İade Teminat Mektubu)

Exporters and certain other VAT-exempt entities are entitled to a refund of input VAT from the Turkish tax administration. To access accelerated refunds above certain thresholds, the Revenue Administration (Gelir İdaresi Başkanlığı) requires a guarantee securing repayment in the event of a future audit finding. An insurance-backed surety bond is an accepted instrument for this purpose, allowing companies to receive cash earlier without waiting for the full audit cycle to complete.

Surety Bonds vs Bank Letters of Guarantee

The comparison between surety bonds and bank letters of guarantee is central to the business case for using an insurer-backed product. Both instruments serve the same underlying function — guaranteeing an obligation — but they differ substantially in how they affect a company's balance sheet and banking relationships.

A bank letter of guarantee consumes a credit line. A surety bond does not. For a company managing multiple tenders simultaneously, this distinction can be the difference between growth and a liquidity bottleneck.
Feature Bank Letter of Guarantee Surety Bond
Credit line impact Reduces available credit facility No impact on banking limits
Collateral Often required (cash, property) Generally not required
Issuer Licensed bank (BDDK) Licensed insurer (SEDDK)
Underwriting basis Credit assessment Financial and technical assessment
Annual cost Commission + opportunity cost of tied collateral Premium (typically lower all-in cost)
Balance sheet treatment Contingent liability, may affect ratios Off-balance-sheet, no loan entry

For companies with strong banking relationships and ample credit headroom, the choice may be neutral. For growing contractors, exporters or project developers who are already utilising significant portions of their credit facilities, freeing up banking lines through insurance-backed bonds can be transformative.

The SME Advantage: Preserving Working Capital

Small and medium-sized enterprises are often the businesses most constrained by the capital requirements of public tendering. A company bidding on three tenders simultaneously may need to tie up 9–18% of each contract's value in bid and performance bonds. If those bonds are all drawn against the same banking facility, the credit limit can be exhausted before a single contract is won.

Surety bonds allow an SME to separate its financial guarantee capacity from its credit facility, effectively expanding its ability to pursue new business. A contractor with a €5 million banking facility does not need to choose between a new tender and an existing project's working capital needs — the surety bond operates in a different lane entirely.

There is also a procurement competitiveness angle. Obligees can sometimes distinguish between applicants based on financial strength. A company able to provide bonds efficiently, without depleting visible credit, can present a stronger financial profile during the tender evaluation process.

What Drives Your Surety Bond Premium?

Because surety underwriters are effectively extending a form of credit, they assess applications in a similar way to a credit analyst. The premium you pay — usually expressed as a percentage of the bond face value per annum — reflects the underwriter's view of the probability that the principal will default on its obligations and a claim will be made.

The key factors that surety underwriters in Turkey examine include:

The Turkish Regulatory Framework

Surety bonds in Turkey are issued by insurance companies operating under licences granted by the Insurance and Private Pension Regulation and Supervision Authority (Sigortacılık ve Özel Emeklilik Düzenleme ve Denetleme Kurumu, SEDDK). This regulatory framework ensures that the insurer has sufficient financial strength to stand behind the bonds it issues.

The key piece of primary legislation is Law No. 5684 (the Insurance Law), supplemented by SEDDK regulations on financial guarantee and surety insurance products. Turkish surety bonds must use approved policy forms, and the issuing insurer must maintain adequate solvency capital under SEDDK's requirements — which have converged increasingly towards Solvency II-style standards.

From the buyer's perspective, the most important regulatory dimension is accepting authority recognition. Not every public body or project owner has updated its internal procedures to accept insurance-backed surety bonds in lieu of bank letters of guarantee. The Public Procurement Authority (Kamu İhale Kurumu, KİK) has published guidance confirming the acceptance of surety bonds in central government tenders covered by Law 4734, but practices vary across municipalities, state enterprises and private-sector project owners.

Not Every Obligee Accepts Surety Bonds

This is one of the most important practical points that any Turkish company considering surety bonds must understand before investing time in the placement process. Even where the law permits insurance-backed bonds, individual contracting authorities may have embedded their own internal template guarantee forms that reference banks specifically, or procurement officers may be unfamiliar with the product.

Before applying for a surety bond for a specific tender, it is worth confirming with the obligee — ideally in writing — that an SEDDK-licensed insurer's bond will be accepted. An experienced broker will know which categories of obligee routinely accept insurance-backed bonds and can help you navigate any preliminary discussions with the contracting authority.

Common Misunderstandings About Surety Bonds

Several misconceptions circulate in the Turkish market that can deter companies from exploring this product or lead to inappropriate expectations.

Surety bonds are not unconditional guarantees. Unlike some bank letters of guarantee, which are payable on first demand without the need to demonstrate breach, a surety bond typically allows the surety to investigate a claim before paying. This distinction matters to obligees who want certainty of payment in a dispute. Understanding the exact demand mechanism in your bond wording is essential.

A surety bond is not a substitute for project management. The surety's due diligence process will probe a company's operational capacity as well as its financial standing. Companies that pass underwriting still need to manage their projects competently — the bond is a safety net for the obligee, not a licence to under-resource the contract.

Premiums are not refundable if the contract is completed early. Unless the bond includes a specific early-termination provision, the full annual premium is generally considered earned. Structuring the bond term to match the realistic project timeline is therefore worth attention at placement.

How an Independent Broker Adds Value

The surety bond market in Turkey involves a relatively small number of active underwriters, each with their own appetite for different sectors, contract sizes and risk profiles. Placing a surety bond directly with a single insurer means accepting that insurer's assessment and pricing without any competitive tension.

An independent broker — licensed by SEDDK and active across the Turkish insurance market — approaches multiple underwriters simultaneously, presenting the principal's financial and technical profile in a consistent and structured way. This competitive process typically produces better premium terms than a direct approach, and it also produces a clearer picture of the market's appetite for your risk profile.

Beyond placement, a broker's value continues through the bond's life. If a contract is extended, the bond term needs to be adjusted. If a dispute arises between the principal and the obligee, the broker can help manage the claims notification process and coordinate with the surety's technical team. To explore our surety bond brokerage services, including the range of insurers we work with and the sectors where we have deepest experience, visit the dedicated section of our website.

Getting Started: What Documents Will You Need?

When approaching the market for the first time, having your documentation in order speeds the underwriting process considerably. Most surety underwriters in Turkey will require:

Some underwriters, particularly for larger bonds, may also conduct a site visit or request references from past project owners. Preparing this information proactively — rather than scrambling to compile it after the tender deadline is announced — can be the difference between securing a bond in time for submission and missing the deadline entirely.