Your order book is full and you have just won a new contract, yet you cannot sign: the client wants a performance bond and an advance payment bond, and the bank says your bond line is already used up. This happens often in construction, manufacturing, equipment and export. It usually says less about the health of the business than about the way its bonds are issued.
Why bond lines fill up
For a bank, a bond is an off-balance-sheet commitment: no cash goes out, but the bank undertakes to pay if the company defaults. So the bond counts against the client’s credit limits, just like a loan or a short-term facility.
Three situations typically use up these limits:
growth: contract volumes rise faster than equity, and bonds grow with revenue;
a large contract: a single major contract calls for several bonds at once (bid, advance payment, performance, retention);
bank policy: the bank cuts its exposure to a sector, a company size or a group, whatever the merits of your case.
The effects are very real: tenders turned down, advance payments left uncollected, and retentions that tie up cash for the whole warranty period.
The bonds involved
Bid bond: submitted with a tender, it shows the bid is made in good faith.
Performance bond: it guarantees the client that the contract will be carried out.
Advance payment bond: it lets you collect the advance payment as soon as the order is placed, while the client is covered if the contract is not carried out.
Retention bond: on French construction contracts, retention is capped at 5% of the contract value and can be replaced by a bond, which frees up that cash.
Customs bond: it covers duties and taxes whose payment is deferred or suspended.
Payment guarantee: it gives a supplier comfort that its invoices will be paid.
Surety providers and insurers alongside the banks
Banks are not the only issuers. Surety companies and specialist insurers issue the same bonds, and public and private clients accept them. The main benefit for the business: these bonds do not usually count against its bank credit lines.
The mechanism is simple. The issuer grants a bond line (an overall limit, sometimes with sub-limits by type of bond or by contract), then issues each bond on request, for a fee. Depending on the company’s profile, it may ask for counter-security: a cash deposit, a shareholder guarantee, or no security at all.
The aim is not to replace your banks but to add bonding capacity alongside them. The bank lines this frees up can then be used to fund working capital.
What issuers look at
Issuers do not assess a business the way a lender does. They look in particular at:
the accounts and equity over several financial years;
the order book and the type of contracts;
the delivery track record: references, disputes and any past bond calls;
how bonds are spread by client, by project and by expiry date.
A single file, prepared once in the format issuers expect, lets you approach several of them properly and compare their limits, fees and counter-security requirements.
Where to start
Map your current bonds by type and expiry date, along with your needs for the next twelve months.
Identify bonds that could be released or reduced: contracts already handed over, retentions that have expired.
Prepare a file for issuers: accounts, order book, references.
Approach a short list of surety providers and insurers suited to your sector and size.
For an overview of these bonds and how we work, see our page Surety bonds and contract guarantees.
In short
A full bond line does not mean the business has reached its limit. More often, it means every bond goes through the same channel. Opening bonding capacity with surety providers and insurers lets you keep signing contracts without eating into your credit lines.
Further reading
How much bonding capacity do you have left?
Six questions, two minutes: get an initial read of your situation and the options worth exploring, then book a call with the team if you wish.