Advertising Functionality: How Using Surety Bonds Can Improve Your Client’s Liquidity

Banks aren’t the only place to turn when you need collateral. Andrew Evans, Head of Liberty Mutual Surety, UK & Ireland, explains why insurance companies might be a better option.

When businesses need collateral, they often turn to their bank. And while this may seem like the simpler approach, policymakers should understand the other options available to them – primarily purchasing a bond from an insurance company. One main reason? To free up cash.

When businesses get a guarantee from an insurance company, they don’t use any of their bank line limits, giving them extra credit to use in other ways to support their business. Often, insurance companies have better credit scores than banks, a key factor in getting customers to accept collateral. Two examples of collateral that can free up cash are pension obligations and payment services regulatory obligations.

Pension guarantees ensure that a company’s pension plan is funded, while deferring actual cash payments. When a company chooses an insurance company for this type of guarantee instead of a bank, it keeps its lines of credit available with its bank and frees up the liquidity that it may have had to put into the system, by keeping cash in the business. Additionally, if the business becomes insolvent, the surety company will ensure appropriate payments into the plan – maintaining exactly the same protection for employees. According to recent legislation, directors may soon be held accountable if they take the appropriate steps to protect their employees’ pension plans. As organizations seek to address this legislation, businesses and insurance brokers need to know how a surety company can help them.

Payment services regulatory guarantees, similar to remittance obligations in the we., are primarily needed by financial and tech companies that process people’s money (for example, PayPal and Worldpay). This type of guarantee makes it possible to exempt any guaranteed fund from the obligation to be confined to the companies’ own treasury, thus increasing the working capital of companies and supporting their activity. Similar to a pension bond, it also protects clients in the event of business insolvency and puts them in the same situation they would have been otherwise.

In addition to improving liquidity, another reason companies should consider securing from an insurance company is risk spreading. Historically, banks and insurance companies have not always been on the same economic cycle. In a recession, or if the banking market is struggling, an insurance company does not necessarily experience the same challenges at the same time as the bank. Having a mix of banks and surety providers helps your business grow.

And yet another way of working with an insurance company to get your guarantees is that insurance companies can provide value that businesses don’t get from a bank. Insurance companies use a robust underwriting process and will seek to provide risk mitigation commentary and advice, while banks primarily review credit only. This provides another layer of risk protection for a business.

When looking for a surety partner, don’t underestimate the value of the relationship. You and your client want a business that is engaged in the surety market, a business that will be with you through good times and bad, and that will stand by your client’s side for the long haul. Make sure the company your client is doing business with has strong financial ratings and the ability to deliver significant bond programs as your client’s business grows.

Contact Liberty Mutual Surety for more information.

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