Surety insurance and bank guarantees are interchangeable options when we need to provide a financial guarantee to ensure compliance with contractual obligations. In these cases, both instruments can be used, either a bank guarantee or a surety insurance.
In this article, we discuss the differences between the two and why surety insurance offers significant advantages.
The surety insurance backs the fulfillment of an obligation. If the obligated party fails to meet their contractual commitments, the insurance company will compensate the beneficiary designated in the policy.
Choosing surety insurance instead of a bank guarantee provides numerous business advantages.
In a surety insurance, the issuer of the guarantee is an insurance company. In the case of a bank guarantee, it is a financial institution. In both scenarios, a financial guarantee is issued, either for private use or to be submitted to a public administration.
The advantages of a surety bond compared to a bank guarantee are:
➡️ Does not block bank balances
Banks often require full or partial cash collateral, immobilizing the guaranteed amount. This impacts liquidity and treasury planning. Additionally, bank guarantees usually have quarterly or annual maintenance costs. Surety insurance, on the other hand, does not tie up cash.
➡️ Does not increase banking risk – not recorded in the Bank Report Risk
Surety insurance is not recorded in the Bank Report Risk, unlike bank guarantees.
What does this mean? Bank guarantees appear in the Bank Report Risk as credit exposure, increasing your company’s banking risk. This can negatively affect future credit requests, such as loans or revolving credit lines.
Using surety insurance preserves banking solvency, a vital factor in a context of high interest rates and credit restrictions.
➡️ Faster and more agile
The issuance and processing of a surety insurance is usually faster and less bureaucratic than a bank guarantee.
➡️ Does not appear as a liability in the balance sheet
A bank guarantee is recorded as a liability in the company’s balance sheet. Surety insurance, however, is treated as an expense in the profit and loss account — not as a financial debt.
➡️ Allows for a multi-bidding strategy
With multiple surety lines in place, a company can participate in several public tenders simultaneously, increasing business opportunities and competitiveness.
➡️ No bundled banking services
Insurance companies issue the guarantee as a standalone service. Banks often require bundling the guarantee with other services (e.g. accounts, deposits) to offer the operation under their terms.
Choosing surety insurance over bank guarantees is becoming a strategic decision.
Once a lesser-known option, it is now gaining ground in today’s economic landscape.
In fact, it is widely used worldwide under the term “Surety Bonds”. Within the European Union, it is a well-established and accepted instrument for both public and private contracts.
In an economic context marked by high interest rates and tight credit conditions, surety insurance emerges as a winning solution.
