Well over a year since the beginning of the pandemic, we are experiencing economic recovery worldwide. Business is reviving and opportunities for international trade abound. And for companies looking to capitalise on these opportunities, surety bonds and guarantees make the world go ‘round.

But what is surety exactly, and how does it work? Most of my clients are familiar with the concept: A surety bond or guarantee is written to provide protection for a company purchasing goods or services from another, and is often a contractual obligation. In other words: no surety, no contract. But it’s not always clear how it works, and why it’s important to choose the right partner to ensure the bond or guarantee supports the growth of a business.
Let’s say you’re a France-based manufacturer of hoverboards. Your company, Hover France (HF), is considering doing business with Brazil-based distributor Fly Things Brazil (FTB). FTB wants to order 50,000 hoverboards on credit, but they also want to make sure that they are protected in case you fail to deliver the boards on time, or at the agreed specifications.

To reduce their risk, FTB asks you to take out a “first demand guarantee” as a condition to enter into contract with them. This type of guarantee is the norm in export situations. It means your company, HF, has to obtain a guarantee from a financial institution that they will pay a certain amount to FTB on request, irrevocably and unconditionally. This protects FTB from any contractual noncompliance on your part, but carries a greater risk for you.

There are three parties in a surety agreement:

  1. Principal (Hover France): the party that purchases the surety and agrees to perform the work in a compliant manner
  2. Obligee/Beneficiary (Fly Things Brazil): the party that buys the work and requires that the principal provide a first demand guarantee to obtain a contract
  3. Surety: an insurance company or bank that guarantees contractual fulfilment by the principal and is liable for claims against them up to a fixed amount. Because of the risk involved, the oblige should ensure that this third party complies with the International Credit Insurance & Surety Association (ICISA)’s regulations in terms of international guarantees.
If FTB is damaged financially by HF’s violation of contractual terms, FTB may file a claim against the surety guarantee. The surety issuer and HF are then liable for any damages up to the full amount of the guarantee.

Companies have good reason to seek out a reliable surety partner—especially when it comes to international trade. The right partner can not only offer specialised service and advice to benefit both you and your client, but even help strengthen your customer relationships to grow future opportunities.

The key capabilities to look out for are:

In-depth knowledge of global markets
Export sureties can be highly complex, and knowledge of relevant local laws, markets and processes is a must.

Bespoke solutions
The complexity of export agreements also means that no two are identical, and beneficiaries often have particular contractual demands. It’s important to have the flexibility to tailor solutions to the particularities of a given contract.  

Partner insights
Before providing a surety agreement, an experienced issuer will leverage their data—such as payment default information from existing clients—to examine the financial health of the beneficiary. Such examination can help the principal gauge the risk of selling on credit, and of events such as the first demand guarantee being called in early.

With the weight of the pandemic finally lifting, it’s time to leverage the available tools to seize the fresh opportunities that await. But there are many unknowns of entering new business partnerships, and it’s important to know what to look for before deciding if a contract makes good business sense.

The right partnerships on each side of a surety agreement is key to boosting your business. Make it happen with tailor-made sureties drawn up by a specialist such as Euler Hermes, with experts that are on the ground all around the world.

Gilles Goaoc

Surety Sales Director, Euler Hermes France