Letter of Credit Replacement Guarantee
What is a Letter of Credit Replacement Guarantee?
A Letter of Credit (LoC) Replacement Guarantee is a form of surety bond that substitutes the need for a traditional bank-issued Letter of Credit. It provides the same financial security to a beneficiary, employer, government body, or supplier, without tying up your working capital or affecting your bank facilities.
This guarantee allows businesses to free up valuable cash or bank lines, offering the same assurance to the beneficiary that obligations will be met, while reducing dependency on banking lines and improving liquidity.
Key Features
01
Replaces traditional Letters of Credit with surety-backed guarantees
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Does not require cash collateral or reduction of existing bank lines
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Typically more cost-effective than traditional LoCs
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Offers increased flexibility for working capital and growth
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Backed by A-rated surety providers recognised by most beneficiaries
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Customisable to match existing LoC terms and beneficiary requirements
What is a Bond?
Placing your first bond? Or just need a refresher? Read on for the what’s what of surety bonds.
Surety protects a business from financial losses, usually caused when one party fails to fulfil their end of a contract. By placing a surety (usually in the form of a bond), a business makes sure that all the project bills will be paid on time should there be any disruptions or problems fulfilling the contract.
Principal
The Principal is the business placing the bond. They are making a promise to the Obligee. To them, the Surety bond is like insurance.
Surety
The Surety promises to pay the Obligee should the Principal not do as they promise.
Obligee
The Obligee is the party that requests the bond from the Principal.
When Might a Letter of Credit Replacement Guarantee Be Required?
This type of guarantee is commonly used when:
- A contractor or supplier is required to provide financial security, but wants to avoid using banking lines
- An importer or trader needs to meet customs or trading partner requirements
- A company wants to improve cash flow by replacing an LoC with a bond that doesn’t require collateral
- A business is scaling and wants to reserve banking capacity for other purposes such as loans, overdrafts, or investments
- A financial institution or counterparty will accept surety in place of a bank-issued instrument
Can PS Surety help?
PS Surety is a dedicated surety bond brokerage and we would be delighted to assist any contractor with placing performance bonds. We are fully regulated by the FCA and we guarantee that we provide our clients with:
The best possible terms available in the market
An honest, open and joint approach to our client’s Surety needs
Detailed client dashboard providing information on every bond ever placed
Communication when bonds become overdue
A single touch point within our organisation for wording reviews, quotes and queries
Rapid responses
That sounds expensive!
Our service is completely free to contractors. We are paid a commission by the surety providers on each bond that we place with them on behalf of our clients, the details of which are fully disclosed in our client dashboard.
The surety providers are happy to pay our commission because we specialise in bringing them business which fits their ever changing underwriting criteria. We also deal with frequent queries, wording issues, bond drafting and general administration.
The price that you pay PS Surety for a bond is the same price that you would pay any Surety if going direct.
Frequently Asked Questions – Letter of Credit Replacement Guarantees
What is a Letter of Credit Replacement Guarantee?
It’s a surety bond issued by a regulated insurer or surety company, which provides the same security as a traditional Letter of Credit but without using your banking facilities.
Who accepts these guarantees?
Many employers, government bodies, and large corporations will accept surety-backed guarantees as an alternative to LoCs – especially when backed by well-rated surety providers. PSS can advise on whether your counterparty is likely to accept one.
How does it differ from a traditional Letter of Credit?
Unlike a bank-issued LoC, a surety guarantee does not reduce your banking headroom or require full collateral. It’s often more cost-effective and flexible.
Are there cost advantages to using a guarantee?
Yes. Premiums for surety-backed guarantees are typically lower than the fees associated with Letters of Credit, and they free up banking lines, which can reduce the overall cost of capital.
Can PSS match my existing LoC format?
Yes. We work closely with clients and surety providers to match or improve upon your current LoC terms to ensure acceptance by your counterparty.
How long does it take to put one in place?
Depending on the structure and the party involved, we can often arrange a replacement guarantee within a few days to a week. Our established relationships with leading sureties allow us to expedite the process.
How do I get started?
Get in touch with PSS and one of our specialist brokers will guide you through the process. We’ll assess your requirements, advise on structure, and approach the market to source the best terms available.
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