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It’s not uncommon to encounter construction projects worth millions of dollars as a contractor, many of which are issued by the government. However, you’ll need to offer the issuer assurance through a surety bond or a bank guarantee before you can work them.
Both of these financial instruments show that you are financially responsible enough to see the project until completion. They serve a similar purpose, yet they have some key distinctions that are important to understand when choosing between them.
In this guide, we’ll settle the bank guarantee vs. surety bond debate by evaluating their pros and cons to help you make informed decisions.
How Bank Guarantees and Surety Bonds Work
A bank guarantee assures a lender they will be paid on time, as they will cover the debt on behalf of the borrower if they become unable to pay. However, they will require collateral from the borrower in exchange for taking on this financial risk.
In construction, bank guarantees prove a contractor’s commitment to a project and increase their chances of winning a project bid. They also foster trust between the two parties, allowing construction contracts to move more quickly through phases.
Meanwhile, surety bonds are legally binding agreements involving three parties:
- Principal - The party that purchases the bond (often a contractor or service provider)
- Surety - The third party that provides the surety bond (the insurance company)
- Obligee - The party requiring the principal to obtain a surety bond (the client or project owner).
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Surety bonds ensure financial security in construction projects by guaranteeing that the principal or contractor will fulfill obligations according to the agreed-upon terms. Otherwise, the obligee can file a claim with the surety, who will then investigate and pay the obligee accordingly if they find the claim valid.
There are several types of surety bonds, all with different purposes in a construction project. Some guarantee a contractor's performance to ensure the contract’s terms will be carried out according to its stipulations, while others ensure payment assurance for suppliers, vendors, and subcontractors throughout the project.
Bank Guarantee vs. Surety Bond: Which is Better?
When it comes to mitigating financial risks, both surety and bank bonds have their time and place. The best way to compare them is across several categories:
| Surety Bond | Bank Guarantee | |
| Definition | A legally binding agreement ensuring payment to the obligee if the contract is breached |
A financial instrument ensuring payment if the borrower cannot repay the debt |
| Purpose | Guarantees that the project will be finished by a specific deadline | Assures that the contractor will fulfill financial obligations |
| Claim Settlements | Simpler and investigated by the bond provider | Complicated and subject to the bank’s approval |
| Third-party Involvement |
Insurance company | Bank |
| Collateral Requirement |
❌ | ✅ |
The Claims Settlement Process
Bank guarantees only become effective when the borrower cannot pay the debt. Once the guarantee is issued, the project owner will receive the payment from the bank. That said, before the guarantee is approved, the bank must first analyze your financial history, including creditworthiness and other debts.
Meanwhile, the claims handling process for surety bonds will first require a thorough investigation by the surety provider. They must determine the claim’s validity and use those findings for their next course of action.
The surety may then choose another contractor to complete the project or compensate the owner for the financial losses. The contractor will then reimburse the surety for the amount paid, plus associated costs such as legal fees.
Ultimately, the claims process is generally more straightforward when it comes to surety bonds when compared to a bank guarantee.
Collateral Requirement
Every surety bond vs. bank guarantee discussion also needs to mention collateral. Specifically, it’s important to recognize how you must provide collateral to a bank before you can secure a guarantee from them. This collateral can take several forms:
- Cash: to be held by the bank as security against the guarantee
- Securities: stocks, bonds, or other marketable assets
- Property: real estate or other tangible assets
- Bank instruments: such as certificates of deposit or letters of credit
Meanwhile, surety bonds do not require collateral. This means that contractors can pursue them to fulfill the needs of the present without compromising the future.
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Third-Party Involvement
Those hoping to find a two-party financial agreement will be disappointed, as both bank guarantees and surety bonds involve a third party to enact them.
For guarantees, the bank must assume the debt in case of non-payment or a borrower defaults. On the other hand, bonds must be secured through a surety provider.
The surety will then ensure that non-performance won’t hinder the project’s completion. This could be done by compensating the project owner if the contractor defaults or takes any other action to ensure the project will be completed.
Secure Your Finances With KASE Insurance
The surety bond vs. bank guarantee comparison is complicated, but the former is generally more flexible and requires no collateral. This makes them a better option for contractors, especially those that may have lower credit ratings.
KASE Insurance is an award-winning provider of surety bonds in Ontario that can provide you with exactly what you need. Whether you need a bid bond to get chosen for major projects or a performance bond to guarantee timely completion, we can help you through the entire process from applying for one yourself to navigating a claim.
Contact us today to learn more about our risk management solutions or to get a free quote!
(416) 588 5273 
