Many businesses are seeking greater access to credit in today’s economic environment, often utilizing credit lines for purposes of procuring letters of credit to satisfy various security requirements. Given the importance of preserving credit lines for other purposes such as funding acquisitions, retiring or refinancing high interest rate debt, or supporting capital expenditures, businesses should consider surety bonds as an alternative.

Surety bonds are becoming an attractive alternative to bank credit because of new trends in the commercial surety business, including the private sector seeking risk transfer alternatives, new industry-specific solutions and improved efficiencies by surety providers. In some instances, commercial surety bonds are the only option because they are required by law. But with bank pricing on the rise, commercial surety bonds are a viable option even when not legally required.

As trusted advisers, agents and brokers can play an important role in reviewing security solutions that won’t tie up credit and will enable the client to take advantage of their financial standing and liquidity. Educating clients about surety bonds can allow them preserve their bank lines of credit for other strategic purposes.

Traditional Use of Bonds
Commercial contract bonds are performance bonds in which the surety guarantees to the obligee (usually a public entity such as federal, state or local government or a private owner) that the principal (client) performs its contractual obligations per the agreed-upon terms and conditions in the underlying contract.

Most people think of construction when they hear about contract bonds, but all types of commercial accounts that enter into contracts to supply and/or install specific products may require contract bonds. The most common commercial contractors are supply contractors, such as manufacturers and wholesalers.

Here are the four most common commercial surety bonds categories:

• License and permit bonds: Compliance-focused products that come in a wide variety of forms.
• Court bonds – judicial and fiduciary: Include appeal bonds, cost bonds, injunction bonds and replevin/attachment bonds.
• Performance and payment bonds: Traditionally used to guarantee the performance of a contract.
• Customs and excise bonds: Tax bonds largely used by companies to guaranty payment of taxes to government agencies.

Why Surety Bonds?

Three key trends in the commercial surety landscape make a surety bond more attractive than ever to agents and their customers.

1) Risk transfer alternative: While the traditional bonds mentioned above continue to offer the same protection, the private sector uses them more widely to free up credit. Much like government agencies that have required commercial surety bonds for projects, the private sector is now using this tool to help transfer risk for many projects.

2) Industry-specific solutions: Some surety carriers now offer bonds that are tailored to address specific obligations while providing specialized expertise throughout the process.

3) Increased efficiencies: The delivery of commercial surety bonds has evolved significantly over the past several years. Today, agents can gain access to a more streamlined and customer-focused approach to underwriting and servicing of transactional surety bond business. This makes it easier to secure commercial surety bonds for clients, saving time and resources for the agency.

By serving as consultants and solution providers, agents and brokers do more than sell products to clients. While some clients understand they have options when it comes to different risk management techniques, deciphering the benefits of surety bonds versus bank letters of credit can be one of the more confusing hurdles. Understanding the new trends in the surety business and clearly explaining how customers can benefit from this alternative is one more way an agency can add value. 

James Forshey is senior vice president of commercial surety for Travelers Bond & Specialty Insurance.