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Surety bonds
A surety bond and a bank guarantee make the same promise, but a bank usually issues against your facilities or cash, while a surety more often relies on a counter-indemnity. That difference can free working capital for a growing business.
Part of: Bonds and surety
In short
Both a bank guarantee and a surety bond promise to pay a beneficiary if you fail to meet a contractual obligation. Banks commonly treat a guarantee as part of your credit facilities and may ask for cash collateral. Insurers issue bonds as suretyship, a class of general insurance under UK law, and more often rely on your financial strength and a counter-indemnity, sometimes backed by a parent company or directors. For many contractors and importers, moving bonds to a surety leaves bank lines free for borrowing. Beneficiaries must accept the issuer and wording.
To the beneficiary, a performance bond from a bank and one from a surety can look almost identical. The differences sit on your side of the arrangement.
| Bank guarantee | Surety bond | |
|---|---|---|
| Issued by | A bank, as part of its banking business | An insurer, as suretyship insurance |
| Legal footing | A banking product | A class of general insurance where the issuer is not a bank and charges a premium |
| Security commonly required | Allocated against your facilities, often with cash collateral or other security | A counter-indemnity, sometimes with parent or director indemnities; collateral less common |
| Effect on borrowing | Usually uses facility headroom | Usually sits outside bank facilities |
| Underwriting focus | Your banking relationship and security | Your accounts, work in hand, track record and the contract |
| Typical wording | Often on-demand | Often conditional on default, but on-demand is possible |
The suretyship class appears in Schedule 1 to the Regulated Activities Order, which lists "fidelity bonds, performance bonds, administration bonds, bail bonds or customs bonds or similar contracts of guarantee", where the issuer does not carry on banking business and issues them for premiums.
When a bank issues a guarantee for you, it takes on a contingent liability. Banks commonly allocate guarantees against your credit limits or ask for security. UK Export Finance, explaining its Bond Support Scheme, says banks typically ask for collateral, often a cash deposit, when issuing contract bonds, and that a partial government guarantee lets the bank return that collateral for use as working capital.
A surety bond usually does not draw on your bank facilities. For a contractor with several bonds outstanding, moving them to a surety can release overdraft or revolving credit headroom, or cash that was sitting as collateral. Whether that is worthwhile depends on the charges, the security each side asks for and your bank's view.
A surety is not insuring you; it expects to be repaid if it pays a claim. Before issuing bonds it will usually ask for a counter-indemnity (sometimes called a deed of indemnity) under which the indemnifiers agree to repay any amount the surety pays, plus its costs.
Take legal advice before signing. Our pages on personal guarantee insurance and directors' personal liability explain related risks.
The beneficiary decides. Some employers and public bodies specify the issuer type or a minimum financial strength, or insist on their own bond form. Ask early, because changing issuer late in a tender can delay award.
HMRC is one example of a beneficiary with clear rules. For customs and duty deferment guarantees, its guidance on choosing a guarantor says it will accept any firm regulated by the Prudential Regulation Authority, and that most major banks and insurance companies are approved to act as guarantors. For Great Britain the guarantor must be UK-established. Importers who need a duty deferment guarantee can therefore often choose between their bank and an insurer; see our importer and exporter insurance guide for the wider picture.
Illustrative: a civil engineering contractor has £600,000 of performance and advance payment bonds issued by its bank, all counted against a £1.5 million facility. It wins a large framework requiring more bonds. By arranging a surety facility for new bonds, backed by a company and parent counter-indemnity, it keeps its bank facility for working capital. The bank bonds run off as the contracts complete. A business that also sells on credit might combine this with trade credit insurance, which some lenders view favourably.
For background on bond types, see performance bonds, retention bonds and our definition of advance payment bonds.
Apex arranges surety bonds and trade credit insurance. A broker reads each enquiry and comes back with options; there is no fee for a quote, and any bond is subject to the insurer's acceptance and the bond terms. To quote we need your business activities, turnover, location and claims history, plus your accounts, a schedule of existing bonds and who issued them, the bond wording and contract you need it for, and your group structure. Our surety bonds guide and bonds and surety definition give more background, and D&O for construction companies covers directors' own exposure.
Both promise to pay a beneficiary if you fail to meet an obligation. A bank guarantee is a banking product, usually allocated against your facilities and often backed by cash collateral. A surety bond is issued by an insurer as suretyship and usually relies on your financial strength and a counter-indemnity instead.
Usually not directly. A surety bond normally sits outside your bank facilities, whereas a bank guarantee usually uses up facility headroom or needs cash collateral. That is the main reason growing contractors and importers move bonds to a surety.
Not always. Sureties usually want a counter-indemnity from the company and often from a parent. For smaller or newer firms they may also ask directors to sign personally, usually on a joint and several basis. Read the scope carefully and take legal advice.
Legally, yes. UK law lists suretyship, including performance, fidelity and customs bonds, as a class of general insurance where the issuer is not a bank and charges premiums. But it does not protect you: if the surety pays the beneficiary, it will recover the money from you.
Yes, if the insurer qualifies. HMRC's guidance says it accepts any firm regulated by the Prudential Regulation Authority, and that most major banks and insurance companies are approved to act as guarantors for customs and duty deferment guarantees.
Tell us what your business does, your turnover and any claims. A broker reads every enquiry and comes back with options. No fee for a quote. Or call 0117 325 0027.
Start a commercial enquiry Request a callbackApex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales, company number 07014570. This page is general information, not advice on your individual circumstances, and it does not guarantee that cover will be available or on what terms.
