Differences Between Surety Bonds And Bank Guarantees 23 August 2019
Surety bonds, which became popular in commercial life lately, are regarded as equivalence of bank guarantees and being commonly used as an alternative project financing.
Banks undertake to pay the bank guarantee amount to the beneficiary in case the debtor fails to fulfill its obligations against the beneficiary. Similarly, the insurers undertake to assume the risk of failure of the debtor fails to fulfill its obligations against the beneficiary. However, there are some differences between the surety bonds and bank guarantees and some advantages of the surety bonds instead of bank guarantees.
- Differences between the Surety Bonds and Bank Guarantees
Legal Nature
Although there isn’t any explicit regulation under Turkish legislation, generally accepted doctrine view is that the legal nature of the bank guarantees is guarantee agreement. However, surety bonds are sui generis agreements.
Benefiting from Pleas and Objections
If the bank guarantee is payable on demand, the bank should make the necessary payment without making any plea or objection of the debtor. Similarly, if the surety bond is non-conditional, the insurer should make the respective payment to the beneficiary open his demand without making any investigation on the legitimacy of such payment claim. However, if the surety bond is conditional, the insurer may make investigation on the legitimacy of such payment claim before making any payment.
Way of Discharge of the Debt
Both guarantees have different types such as repair/maintenance, participation to tender, performance of a contract. At this point, although it may be said that the risks assumed by the bank and insurer are similar, there may be some differences regarding the way of discharge of the debts. Banks fulfill their obligations under the bank guarantee by paying the bond amount to the beneficiary. However, the insurer may prefer to maintain the performance of the debt by third parties by assuming the related costs and expenses.
Auditing Authority
The auditing authorities who audit the institutions providing the guarantees are different. Banks which issue the bank guarantees are audited by Banking Regulation and Supervision Agency. However, the insurance companies which issue the surety bonds are audited by Ministry of Treasury and Finance.
- Advantages of Surety Bonds
First of all; due to the reason that surety bonds are not registered to the balance sheets of the companies and accordingly, do not affect the credit line of the same, surety bonds are more advantages when compared to bank guarantees. By this means, the credit line allocated for bank guarantees may be used for other activities of the companies.
Although the bank guarantees are issued after the investigation of the financial capacity of the companies, surety bonds are issued after the investigation of not only the financial capacity of the companies, but also the technical capacity of the same. Accordingly, issuance of a surety bond may be regarded as a presumption for the technical adequacy of such the company.
Finally; premiums to be paid for conditional surety bonds are generally less than the commissions to be paid for the issuance of bank guarantees.
