What is the difference between a surety bond and a bank guarantee?
Surety bonds are typically conditional whereas bank guarantees are on demand. Only the performance risk lies with the surety, where the bank has the financial risk on the construction project.
Accounting wise, surety is accounted for as a liability like other insurance products whereas credit risks in a bank by nature are accounted for on the asset side.
Although in many countries originally banks mainly issued bonds, the security provided by an insurer has proven equally acceptable. This has enabled many enterprises to set up separate lines of credit and bonds with surety or insurance companies. In doing so, they protect their lines of credit with banks, which might otherwise be blocked at such time when this working capital was needed. Banks usually prefer to issue so-called “on demand” bonds and must therefore treat them as un-presented letters of credit.
Unlike traditional insurance, sureties do not undertake to spread risk but rather to pre-qualify and rigorously select their principals.
* What is a surety?
* What kind of surety bonds does a surety insurance company issue?
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