Replacing letters of credit with surety bonds is beneficial for a client who had to put up a letter of credit in the first place. Many clients do not know where to turn when they need a surety bond, and finding an intelligent agent who can walk you through the process and make it as simple and painless as possible is worthwhile.
Many different obligations require letters of credit or a surety bond. Clients who turn to my office generally do not have a surety bond broker or agency they can turn to, who can quickly put together a bond. When they go to their bank to get a letter of credit, they find that banks often require dollar-for-dollar security. This is generally in the form of cash, a hold on their credit facility, or some other type of security. In addition to tying up their capital, banks move slowly, charge application fees, and generally have higher annual fees than a surety bond costs.
A surety bond can secure the guarantee through an indemnification agreement if a client has adequate financials. That means the client will not have to put up collateral to secure the bond, which would free up capital. At the end of the day, companies want to be more efficient and reduce the amount of capital tied up to secure an obligation. By using a surety bond, they can do just that.
Additionally, the time it takes to obtain a letter of credit vs. a surety bond is several days to several weeks longer.
Also of note is that you may have a cost of capital that is several percentages above the annual bond premium. Using a surety bond instead of a letter of credit would result in significant savings.
As more private equity companies make acquisitions, they look to replace letters of credit with surety bonds to reduce their overall cost of capital and the amount of security put up behind the bonds. Finding a company like Pedersen & Sons Surety Bond Agency that can navigate those different obligations is enormously beneficial. Having a responsive company on your side is always recommended in the surety industry.
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