Commercial entities are starting to see surety bonds as an attractive alternative to traditional letters of credit L/Cs according to the Insurance Business magazine.

It says this is due to concerns about interest rates in many global markets, causing companies to look for more reliable, cost-effective credit solutions.

L/C alternative

US surety practice leader at global insurance brokers and risk management consultants, Marsh, told the magazine that many who previously looked to manage their risk through an L/C are finding that surety bonds provide a really good alternative.

Surety bonds "often come at a cost advantage, leaving borrowing space available for other financial necessities," he said.

How it works

A surety transaction involves three parties: the obligee, the principal, and the surety.

A surety bond protects the obligee to whom the bond is paid to in the event of a default against losses, up to the limit of the bond, that result from the failure of the party with the guaranteed obligation to perform its obligation.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.