When your business is required to guarantee the fulfilment of its obligations, or when it expects its clients to provide such security, two instruments typically come into consideration: the surety bond and the bank guarantee. Both solutions offer security and financial backing, yet the question inevitably arises as to which option is better suited to your company’s commercial and financial objectives?
In this article, we examine the key differences between surety bonds and bank guarantees, providing the insight needed to make an informed decision aligned with your business requirements.
The Role of Surety Insurance and Bank Guarantees
To begin with, we outline how each of these financial instruments operates when required under legislation or stipulated within a contractual framework.
Guarantees Required by Law
Where a guarantee is required by law, both surety bonds and bank guarantees ensure that the insurer or the bank will indemnify the beneficiary (typically a public authority), in the event that the principal fails to comply with the obligations set out in the relevant legislation. The guaranteed amount, duration and specific terms are determined by the relevant legislation under which the guarantee is required.
This is the case for guarantees required from companies participating in public tenders, as established under Spanish Law 9/2017 of 8 November on public sector contracts. Similar requirements apply in certain regulated industries, such as renewable energy, where guarantees are mandated under Royal Decree 1183/2020 of 29 December, governing access to and connection with electricity transmission and distribution networks.
Importers, exporters and customs agents are likewise required to provide guarantees under Regulation (EU) No 952/2013 of the European Parliament and of the Council of 9 October 2013, which establishes the Union Customs Code.
In addition, sector-specific licensing frameworks often require the provision of guarantees as a condition for operating. This applies to activities such as travel agencies, real estate agents, property managers, insurance brokers, security companies and temporary employment agencies, among others.
Guarantees required by contract
Where a private contract requires a contractor to provide a guarantee to the developer or beneficiary, both surety bonds and bank guarantees cover contractual default relating to works, services or supplies, as well as advance payments provided for under the contractual terms. The amount and conditions of the guarantee are those agreed between the parties within the contract itself.
In practical terms, both instruments serve the same fundamental purpose: to secure payment by way of compensation or penalty in the event that the policyholder fails to meet its legal or contractual obligations.
Main differences between surety insurance and bank guarantees
Having established their functional similarities, it is worth examining the key differences between these two financial instruments.
Nature of the Issuer
As outlined above, a surety bond is issued by an insurance company, whereas a bank guarantee is a banking product issued by a credit institution.
Cost Structure and Payment Terms
The cost of both instruments depends on the amount to be guaranteed. However, bank guarantees typically entail additional charges, including facility opening fees, credit assessment costs and ongoing maintenance commissions, which are usually payable on an annual basis. Payment terms are often agreed quarterly.
By contrast, a surety bond requires the payment of an annual premium. If the policy is cancelled before maturity, the unused portion of the premium is refunded on a pro-rata basis. In many cases, this makes surety bonds a more cost-efficient solution than bank guarantees.
Requirement to tie up financial assets
As a general rule, a bank guarantee requires the applicant to provide collateral. This may take the form of a cash deposit, the pledging of real estate or securities, or the immobilisation of other financial assets.
Surety bonds, on the other hand, do not require capital to be tied up, nor do they erode liquidity. This makes them particularly suitable for transactions where companies need to preserve financial resources in order to continue funding their day-to-day operations.
Notarial formalisation in public contracts
Bank guarantees are commonly formalised before a notary, which adds an extra layer of cost. Surety bonds do not usually require notarial execution.
Impact on risk exposure
As a financial product, a bank guarantee is recorded in the Central Credit Register of the Bank of Spain (CIRBE), thereby increasing the company’s reported risk exposure. A surety bond, by contrast, is classified as an insurance product and therefore does not count as bank risk. This represents a significant advantage for companies seeking to maintain a healthy credit profile, as it can facilitate access to financing on more favourable terms.
Service efficiency and speed
The provision of a guarantee is typically the final step in a contractual negotiation, coinciding with contract signing. As a result, companies require guarantees to be issued quickly and efficiently. Surety bonds do not require notarial validation unless specifically requested by the beneficiary and can be issued with an electronic signature, significantly streamlining the process.
In summary, while bank guarantees and surety bonds serve a similar purpose, they differ substantially in terms of cost, financial impact and operational flexibility. As a general rule, Solunion recommends the use of surety bonds for most commercial transactions requiring a payment guarantee, reserving bank guarantees for exceptional cases where they are expressly required.