Small businesses in India are fast-growing, ambitious, and agile—but share a common problem of a lack of financial trust. Even when they are capable of delivering, small and medium sized enterprises (SMEs) often are disqualified or in greater cases get paid late for contracts simply because they can’t produce a bank guarantee. In an environment where collateral is more important than ability, how can you build credibility without tying up precious cash?
This is where surety bonds are stepping in. When surety bonds are issued, they don’t provide cash like they would if they were a loan. They are a guarantee; a business will perform as they promise. If the project goes wrong, the insurance company who has issued the surety bond steps in and pays the project owner. The insurance company will then seek to recoup from the business later.
This is built on trust and performance and not cash on hand. The arrangements is straight forward: 3 parties are involved. The business (the principal), the project owner (the obligee), and the insurance company (called the surety). This arrangement provides the project owner with confidence and allows the business to perform with more freedom.
Surety bonds do not require margin money or collateral like bank guarantees. Thus, businesses do not need to tie up cash or pledge assets to obtain one. This provides businesses with available working capital, improved cash flow, and the ability to take on larger projects without cash flow concerns.
There are several categories of surety bonds to be used at different stages of a project. The bid bond is the bond used in applying for a contract. The performance bond is used after the project is awarded. The advance payment bond is used when the contractor is receiving upfront funds. Lastly, the retention bond is used to ensure resolution of any issues after completion of a project. Together, these products provide a consistent level of support and assurance through the life of a project.
