In the ever-evolving world of finance, organizations need creative solutions to navigate the challenges triggered by economic uncertainties, such as interest rates, inflation and global market fluctuations. Two alternative financial tools companies often employ to overcome specific industry challenges include letters of credit and surety bonds. Neither are new to the financial sphere, yet one possesses distinct advantages over the other by enhancing security, increasing credit capacity and streamlining operations.1

Meet Bonds. Surety Bonds.

Letters of credit, traditionally issued by banks, serve as financial guarantees for payment to a beneficiary, but sureties provide a unique set of advantages that protect your customers and your business through a third-party surety company. Unlike letters of credit, sureties go beyond providing financial security by incorporating a meticulous and rigorous prequalification process with ongoing monitoring and greater oversight.2

A surety bond agreement involves a contract between three parties, including:

  • The Obligee, who is the entity protected by the bond if the agreement is not fulfilled.
  • The Principal, who is responsible for fulfilling the obligations of the written contract for the benefit of the obligee.
  • The Surety, who is responsible for fulfilling the claim in the event of a principal’s default or failure to perform.

Because sureties are designed to prevent loss, surety companies conduct thorough prequalification investigations into an organization’s business operations, which includes its financial strength. Unlike banks issuing letters of credit, sureties evaluate a principal’s necessary skills, talent and resources, as well as their past performance.

Surety bonds cannot be cancelled, providing ongoing security, and sureties offer additional protection by monitoring the principal’s work, proactively identifying potential issues in their ability to meet their contractual obligations. The ongoing oversight also aids in preventing performance problems on bonded projects.

Other advantages include3:

  • Balance Sheet Relief and Cashflow: Surety bonds provide off-balance-sheet engagement, enhancing liquidity without impacting operating lines or debt covenant ratios. Unlike letters of credit, which can reduce credit lines, surety credit boosts an organization’s financial flexibility and helps prevent cashflow issues during projects.
  • Increased Credit Capacity: Establishing a surety credit facility introduces a separate credit tranche, supplementing existing capacity and providing a "capacity cushion" against unforeseen constraints.
  • Creditor Diversification: Surety bonds manage exposure to creditor risk, aligning behind secured lenders and minimizing concentration risk. The unsecured position and strong credit ratings of surety creditors make them complementary to existing arrangements.
  • Cost-Effective Solutions: Surety bond rates are often lower than letter of credit rates, with no additional costs other than a minimal annual fee to keep the bond program active. Cost-effective surety solutions create significant savings compared to traditional banking alternatives.
  • Trigger Instrument: Surety bonds act as "on default" instruments, maintaining a fair balance between all parties involved in the contract. In contrast, letters of credit can be demanded at any time without a demonstrated default, providing less protection to the principals.

Consider Your Needs
The choice between letters of credit and surety bonds is a pivotal decision that hinges on an organization’s specific needs and financial goals. While both instruments provide essential financial security, the unique benefits of surety bonds — including off-balance-sheet relief, increased credit capacity and ongoing monitoring — position them as a modern and effective choice for businesses.

Contact HUB International’s surety bond experts to learn more about using this financial tool to protect your next project.

1 Liberty Mutual, “Bonds as Alternatives to Letters of Credit,” October 26, 2020.
2 EY QUEST Group, “The Economic Value of Surety Bonding,” November 2022. 
3 Surety Association of Canada, “Information Paper: Surety Bonds vs. Letters of Credit,” accessed Jan. 11, 2024.