When securing construction contracts or business deals, many people use Letters of Credit (LCs). However, a surety bond is often a better choice. Here are six reasons why:

1. Better Risk Management

Before issuing a surety bond, the provider (Surety) carefully checks the Principal’s financial status, experience, and workload. This gives the project owner (Obligee) confidence that the job will be completed as promised.

For example, in renewable energy projects, a surety bond ensures that a company will meet its contract obligations. On the other hand, a Letter of Credit is usually issued based only on financial details and security provided to the bank. Alpha Surety can help you secure the right surety bond for your project needs.

Fact: Studies show that unbonded projects are more likely to fail than bonded ones.

2. Stronger Financial Protection

Surety bonds provide financial security in three ways:

• Performance bonds ensure that the Principal completes the project and compensates for delays.
• Payment bonds protect workers, suppliers, and subcontractors by ensuring they get paid.
• Warranty coverage for up to 12 months is often included.

If a project fails, the Surety steps in to help. In contrast, an LC only releases money upon request, but the project owner still has to find a new contractor and handle extra costs.

3. Dispute Resolution & Support

When a problem arises, a Surety investigates claims to ensure fair handling. For example, if a contractor stops work due to non-payment, the Surety will review the case carefully before taking action.

An LC, however, simply releases funds without investigating. It also does not support project completion, and once the money is used, the contractor may not have enough resources to finish the work.

4. Better Security & Working Capital

A surety bond does not affect the Principal’s credit or tie up capital, allowing better financial management. An LC, however, reduces available credit and affects financial stability.

5. More Flexibility

A surety bond automatically covers small increases in contract value. If a project changes, it stays in effect throughout. An LC, however, needs manual adjustments, which may affect the contractor’s credit.

Additionally, a surety bond remains valid even if the Principal’s ownership changes. An LC might need reissuing, causing delays.

6. Economic Benefits

Studies show that:

• Projects without surety bonds cost up to 85% more when contractors default.
• Unbonded projects take nearly twice as long to complete.
• Bonded projects are more likely to finish on time.

Conclusion

A surety bond offers more protection, financial security, and flexibility than an LC. It ensures project completion and provides better support in case of disputes. Choosing a strong and reliable Surety can make all the difference in securing a successful project.