Surety Bond Companies are Far More Advantageous than Letters of Credit
Surety bond are already known to most businessmen or businesswoman, or just certain individuals that are interested in joining this partnership. There is also what we call the letter of credit which more or less work like a surety bond but there is at some point some differences. These differences will be tackled further within this article.
In a surety bond, the bond is more focused in protecting the owner through performance bonds whenever the contractor is unable to perform its specific obligation. This is made possible because of its three party involvements. The main persons within this party are the obligee or the project owner and the principal which is the contractor. If in any situation the contractor is unable to settle its payment due to some problems then the surety bond will pay these deficits for the meantime until the contractor can actually settle its own deficits financially. Bank letters of credit on the other hand guarantees direct cash to the owner but the bank has no obligation to pay whenever there would be financial problems from the contractors.
There are also differences between the two in terms of qualification to avail either the bond or the letters of credit. Before you can actually be approved to be part of a surety bond, your contractor’s operations in his/her business, as well as its financial status, years of experience in the business, organizations, present workload, and income will be evaluated by a surety bond company. Aside from the previously mentioned, the most important thing to evaluate is the contractor’s ability to actually perform its obligation as indicated in the contract to prevent failure to pay incidence. For opening a letter of credit, a banker would be the one to the excellence and liquidity of the security in situations of demand on the letter of credit. There would be no other qualifications to be done by the banker if he or she will be satisfied when a contractor will be able to reimburse the bank exactly what is made upon the letter of credit.
The coverage of a surety bond is a 100% both on performance bond and payment bond of the exact contract amount for completion of a project and in protecting the subcontractors, workers, suppliers of the different materials needed, and the owner. There is also a 10% coverage given in the maintenance of any defects after a year of completion. While the coverage of letter of credit will give about only 5% to 10% from the contract but this would not protect or guarantee subcontractors, workers, and suppliers when the contractor is unable to pay. Filing liens on the project may also be filed by the bank.
Want to know more about how Surety Bonds far outshines Letters of Credit? American Surety Bonds answers it all for you.
