Many people are surprised the first time they seek a bond, to discover that collateral can become a vital part of the process. Since in many ways, a bond is more akin to a loan than to an insurance policy, bonding agencies can often desire something against which they can secure the services they offer. That’s collateral.
But what is acceptable as collateral under a surety bond? There are a number of different options available. Check out three different types of surety bond collateral that might become essential in order to secure and complete your bonding process.
Surety Bond Collateral
Surety bond collateral forms a sort of security deposit against the bond. It’s put up by the principal (the bond applicant, or you) to reassure the bond company, or surety, that you have the credit and capability to repay the bond, should you need to use it. It reduces the risk the surety holds, as well as their exposure.
Things the Company Considers
There are four general aspects that a surety will take into consideration when accepting an application for a bond. These are the type of collateral, the required value of the collateral, the time of release, and the kind of protection offered by the collateral.
The three most common and widely accepted forms of collateral for a surety are irrevocable letters of credit, certificates of deposit, and fixed assets.
Irrevocable Letters of Credit
The safest and preferred form of collateral across the board are irrevocable letters of credit, or ILOC. These are usually issued by a bank, and are also sometimes called Standby Letters of Credit. They are awarded based on the bond applicant’s current financial standing, and serve as a contract between the surety and the bank, where the surety is a beneficiary.
An ILOC, in brief, promises that the bank will pay the surety if needed, via a loan issued to the bond applicant.
Certificate of Deposit
A certificate of deposit is another form of collateral that is fairly widely accepted. It’s more commonly known by its abbreviation, or CD, and is provided by a local bank and backed by the FDIC, or Federal Deposit Insurance Corporation. These certificates all the bank to retain the money for a certain length of time, allowing them to gain interest on return, while they guarantee repayment at the end of this term.
Fixed assets include real property and can be anything from heavy equipment to buildings or land. To serve as collateral, they must undergo a professional appraisal, they must be insured, and they must not be encumbered in any way, such as by a lien. In general, this is to make certain that a company not only puts up property of proper value, but that they don’t try to use the same property as collateral against two different bonds.
National Surety Services, Inc.
If you’re in need of the best surety bonding services around, or you just have questions about which (if any) collateral you’ll need, explore the NSSI website, read about the services we offer, and contact us for more information today.