Surety Bonding - Costs & Benefits
Establishment cost is $500.00, plus any specific legal charges for establishing the facility.
There are no annual line charges on the facility.
Bond Fees range from 0.80% to 3.00% of the face value of the bond per annum. ACGS adds significant value at this point by working with the underwriters to identify the key risk items and the risk mitigation practices to reduce the premium.
More importantly, how much does it save on cost? The economics are defined by the value of available cash, or security, in your business. In technical terms your weighted average cost of capital, the cost of procuring cash will, in 99.9% of cases, be far greater than the income earned while security funds are on deposit backing the bank guarantee. The table below compares the costing associated with bank guarantee and surety bond instruments:
|BANK GUARANTEE||SURETY BOND|
|A||Bond Face Value||$5,000,000||$5,000,000|
|B||Bond Application Fee||$100||$100|
|C||Issue Fee (per annum)||1.5%||1.75%|
|D = A x C||Issue Cost||$75,000||$87,500|
|E||Interest on Cash
|F||Less WACC Cost
(Base Rate = 175 points)
|B + D - E + F||Cost of Facility||$162,600||$87,600|
|Annual saving by using Surety Bond||$75,000|
For larger businesses where the bank guarantee facility is backed by a fixed and floating charge on the company or other specific asset security the opportunity cost of the locking out the funding potential is the measurable cost.
Overall, ACGS sees insurance surety bonding as a cash flow and cost-positive solution to your performance bonding requirements.