Saturated guarantee lines: how to keep signing contracts

Your order book is full, a new contract has just been won, and yet signing is stuck: the client requires a performance bond and an advance payment guarantee, and the bank replies that the guarantee line is already used. This is common in construction, industry, equipment and export. It has less to do with the company’s health than with how the guarantees are issued.

Why guarantee lines reach their limit

For a bank, a guarantee is a commitment by signature: it pays out nothing, but undertakes to pay if the company defaults. The commitment is therefore counted against the credit limits granted to the client, just like a loan or a short-term facility.

Three situations push these limits to the ceiling:

• growth: contract volumes rise faster than equity, and guarantees follow revenue;

• a large contract: one major contract calls for several guarantees at once (bid, advance payment, performance, retention);

• the bank’s policy: reducing exposure to a sector, a company size or a group, regardless of the file.

The consequences are concrete: tenders declined, advances not collected, retentions tying up cash for the whole guarantee period.

The guarantees concerned

• Bid bond: it accompanies the offer in a tender and backs its seriousness.

• Performance bond: it assures the client that the contract will be performed.

• Advance payment guarantee: it lets you collect the advance at order, the client being covered if the contract is not performed.

• Retention bond: in French construction contracts, retention is capped at 5% of the contract amount and can be replaced by a guarantee, which releases that cash.

• Customs bond: it covers duties and taxes whose payment is deferred or suspended.

• Payment guarantee: it reassures a supplier that its invoices will be paid.

Surety providers and insurers, alongside the banks

Banks are not the only issuers. Specialist surety providers and insurers issue the same guarantees, accepted by public and private principals. Their main advantage for the company: these commitments generally do not count against bank credit lines.

It works simply: the issuer grants a bond facility (an overall limit, sometimes with sub-limits by guarantee type or by contract), then issues each guarantee on request, against a fee. Depending on the company’s profile, it may ask for a counter-guarantee: a deposit, a shareholder guarantee, or no security at all.

The aim is not to replace the banks but to add issuance capacity alongside them. The bank lines freed up can then fund working capital.

What issuers look at

The decision rests on a different reading from a lender’s. Issuers look in particular at:

• accounts and equity, over several financial years;

• the order book and the nature of the contracts;

• the performance track record: references, disputes, past calls on guarantees;

• the spread of guarantees by client, by project and by maturity.

A file prepared once, in the expected format, makes it possible to approach several issuers on good terms and to compare limits, fees and counter-guarantees.

Where to start

1. List current guarantees outstanding, by type and maturity, and the needs for the next twelve months.

2. Identify guarantees that could be released or reduced: contracts accepted, retentions that have expired.

3. Prepare an issuer file: accounts, order book, references.

4. Approach, in a targeted way, the surety providers and insurers suited to your sector and size.

For an overview of the guarantees and our approach, see our page Bonds and contract guarantees.

In short

Saturated guarantee lines do not mean the company has reached its limit. They often mean that every guarantee goes through the same channel. Opening issuance capacity with surety providers and insurers lets you keep signing contracts without using up your credit lines.