Benefits of Bank Fronted Surety Bonds

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By Travelers
47 minutes
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Uncertain economic times, with higher interest rates and tightened credit requirements, create conditions where businesses may want to maintain more liquidity to support day-to-day operations and address unexpected events.

Bank fronted surety bonds can help companies maintain continuity of operations and avoid dipping into other funding resources such as their line of credit. These bonds allow businesses to satisfy guarantee requirements that may not be met by a traditional surety bond – in countries or jurisdictions where traditional surety bonds are not common or acceptable, for example. In addition, using bank fronted surety bonds enables businesses to diversify their capital sources and maintain financial flexibility by preserving their existing borrowing capacity.

Understanding Bank Fronted Surety Bonds

Gain an understanding of bank fronted surety bonds, a form of guarantee frequently used – and often required – in many business and regulatory situations.

How Does a Bank Fronted Surety Bond Differ from a Traditional Surety Bond?

A traditional surety arrangement involves an agreement among three parties whereby a third-party entity (the surety) stands behind a company (the principal) and provides a guarantee to the other party (the obligee) that the principal will fulfill an obligation. If the principal fails to fulfill this obligation, the surety will complete the obligation or compensate the obligee for the financial loss.  

A bank fronted surety bond includes a fourth party: the bank. With a bank fronted surety bond, a surety uses its financial position and relationship with a bank to procure a letter of credit on behalf of its client (the principal). In a bank fronted structure, if the bank receives a demand under the letter of credit the bank will look to the surety for payment. 

Benefits of Bank Fronted Surety Bonds Infographic, see details below

To access a bank fronted surety bond, the principal requests the bond through their broker or agent, as they would a traditional surety bond. The surety then asks the bank to execute a letter of credit on behalf of the principal. The surety then counter-guarantees the transaction by issuing a bond to the bank.

The obligee/beneficiary (the contracting company or regulatory body) receives the letter of credit directly from the bank.

Who Needs Bank Fronted Surety Bonds?

Organizations can use bank fronted surety bonds domestically and internationally. They are helpful for situations when:

  • The obligee/beneficiary does not accept a standard surety bond.
  • The obligee/beneficiary limits the amount it accepts in the form of a traditional surety bond and requires a letter of credit in addition to the bond.
  • It is necessary to satisfy guarantee requirements in countries or jurisdictions where traditional surety bonds are unavailable.

Examples of Bank Fronted Surety Bonds:

  • Insurance programs. On high deductible and loss-sensitive insurance programs, insurance carriers typically require collateral to guarantee the payment of premium, deductibles or self-insured retention by the insured. A letter of credit is usually required for at least a portion of the total collateral. A bank fronted surety can satisfy this requirement.
  • Lease agreements. When companies with international subsidiaries need to rent office space, a bank fronted surety bond can help provide a guarantee for the rental cost obligations without tying up liquidity.
  • Money safeguarding guarantees. For international companies that regularly collect funds on behalf of accounts, retailers and clients, a bank fronted surety bond helps protect the funds in case of bankruptcy.

Benefits of Bank Fronted Surety Bonds vs. Traditional Letters of Credit

For organizations operating in industries and locations in which obtaining traditional surety bonds or letters of credit is more challenging, bank fronted surety bonds provide a viable alternative. Companies may find the following key benefits appealing:

  • Potential cost savings. Instead of going directly to its bank for a letter of credit, the principal can leverage its surety relationship to get a bank fronted surety bond, satisfying the security requirements while potentially saving on premiums and bank fees.
  • Liberated liquidity. By using a bank fronted surety bond, a business can better maintain the limits of its existing lines of credit from its lenders, helping grow its organization and improving general cash flow.
  • More favorable financial ratios. A bank fronted surety bond is typically an unsecured credit that frees up collateral or guarantee requirements, which can help improve the principal’s financial position and outlook.
  • Streamlined guarantee process. For businesses unfamiliar with operating internationally or in jurisdictions where traditional surety bonds aren’t accepted, a bank fronted surety bond can help make it easier to obtain guarantees. This convenience can be a big benefit, especially when a beneficiary requires a local bank in a foreign jurisdiction to issue a letter of credit.

Choose a Provider with Proven Capabilities and International Experience in Bank Fronted Surety Bonds

For specific businesses, bank fronted surety bonds provide more flexibility when posting guarantees with clients and regulators. They can help companies retain financial liquidity and capacity and potentially save on bank fees while streamlining the bonding process.

Travelers offers industry-leading bond products. In addition, Travelers has connections with a network of global banks, which makes doing business internationally more accessible for Travelers business customers.

Learn more about how Travelers helps companies large and small – from sole proprietorships to multinational conglomerates – deftly leverage surety bonds as a strategic financial tool to strengthen their broader business strategy. Then find an independent agent near you to discuss how Travelers can help you meet your business goals.

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