Top 3 Advantages of Surety Bonds Over Letters of Credit for Contractors

Many companies require contractors to guarantee their work through a third-party agreement. Simply put, if the work is not done properly or on time, the company hiring the contractor wants to make sure they’re compensated. Contractors can choose either surety bonds or letters of credit, but there are three main advantages to purchasing surety bonds.

Assets Aren’t Frozen

With letters of credit, which are purchased from banks, the lending instruction freezes liquid assets for a predetermined period. This ties up the company’s cash, which is why companies instead choose to purchase surety bonds in Connecticut. The bonds are typically written by insurance companies and don’t impact liquidity.

Rates Are Lower

Surety bond rates typically hover around 1% to 3% of the guaranteed sum, whereas letters of credit fees are tied to the financial markets with fluctuating rates. In addition, the reduced liquidity is a hidden cost as the company is unable to take on other projects for the duration.

Claims Are Handled Better

Surety bonds come with a considerably better claims handling process. Banks have no apparatus for investing claims and are therefore more prone to fraud, whereas insurance companies that typically write the bonds are equipped to investigate before paying claims. Since the contractor is ultimately responsible for reimbursing the loss or forfeiting collateral, not paying fraudulent claims in the first place is important.

Both surety bonds and letters of credit will guarantee work. However, the advantages of surety bonds make them a clear choice for many contractors.