Surety Bond Vs Letter Of Credit – What’s The Difference?

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  • Surety Bond Vs Letter Of Credit – What’s The Difference?

There are many financial products that help a construction company to grow, both in the private and public sector.  Two of these products, a surety bond and a line of credit, can be helpful in becoming more successful.  Knowing the difference between the two can help your business to grow.

Surety Bonds vs Lines of Credit

To start, both surety bonds and lines of credit (LOCs) provide financial protection. Yet surety bonds tend to take that protection a step further.  By definition, a surety bond is a three party agreement between the project owner, the surety bond producer and the contractor.  Two of the most utilized surety bonds in the industry are performance bonds and payment bonds.  A performance bond ensures that the contractor upholds the contractual obligations specified in the contract.  A payment bond guarantees that the contractor pays all associated with the project.  This can be anyone from laborers to subcontractors, material suppliers and other employees as specified in the contract.  A LOC is a cash guarantee.  It allows the owner to call upon it on demand.  It works as a payment to the owner, but is an interest loan for the contractor.

A surety bond is based on the financial solvency of the contractor.  It does not diminish the contractor’s borrowing capacity.  This is not true for a LOC which does diminish the contractor’s credit.  In addition, a LOC does not look at the financial history of the contractor.  Instead it looks at the collateral and the ability of the contractor to pay back the loan.

Also, a surety bond is good for the duration of the project. Whereas a LOC is date specific (typically for one year).  A surety bond is obtained from a surety bond producer, a bank issues a LOC.  Coverage also differs. A performance or payment bond is 100% of the contracted amount, whereas a LOC only covers, generally, between 5-10%.  The cost of a surety bond also differs from a LOC, in that a surety bond is generally, between ½% and 3%.  Whereas a LOC is 5-10%, generally speaking.

How We Can Help

Knowing how to utilize different financial products in the construction industry can massively help you to successfully compete in the construction industry.  But, contractors and construction companies have enough to navigate in other areas of the construction industry.  Having a knowledgeable, reputable and loyal surety bond producer can take a weight off your shoulder and help you to concentrate on other avenues to grow your business.

Contact us for any questions you may have or to start assessing your surety bond needs.  We pride ourselves on our knowledge of the industry, customer service and loyalty as well as having some of the best relationships with underwriters, in the industry.