The guarantee is a cheap way, the contractor can guarantee to perform the work in accordance with the specifications within the specified time. For contractors, the main advantage is a low cost, freeing their assets, and ensuring work performance, which will severely limit their ability to perform multiple jobs.
From the customer’s point of view, the guarantee means that if the contractor fails to fulfill its contractual obligations, timely payment is made to get the work back on track. Another benefit, which is often overlooked, is that a letter of guarantee can be written to ensure that the customer pays the contractor.
A guarantee is when a construction company has a guarantee to prevent theft or damage. Like the construction industry, covered bonds are also applicable to many other industries.
They can be used to perform tasks, such as laying tiles on roofs or installing pipes in structures, or delivering materials, equipment, or other goods in a timely and complete manner.
In some cases, they are required by the customer of the contract, and in other cases, they are a prerequisite for the government to issue a business license. Companies that require bonded business licenses often publicize this fact to prove their reliability and integrity
When someone applies for a letter of guarantee, the guarantor will investigate the applicant’s credit history. There are three parties to the secured bond the creditor or customer the principal or contractor and the guarantor, which is the guarantor’s company.
When a client applies for a guarantee, the guarantor’s method of investigating the application is roughly the same as the method of reviewing the loan application, reviewing the client’s past performance history, credit history, and financial stability.
The principal pays the premium, which is determined based on the guarantor’s survey, and usually only accounts for 1% to 5% of the total bond, although the cost of high-risk bonds may be as high as 20% of the total bond.
Relatively low guarantee cost is its main benefit. If there is no guarantee, the creditor has reason to require the client to mortgage his own funds and use the letter of credit to guarantee the performance of the contract.
This will place a heavy burden on everyone except the largest client, and in most cases, it will unnecessarily occupy a large amount of money for a long time, because the right holder can be bad for a long time after the work is completed.
Performance claims. In the case of insufficient performance, another method of recovering money is to file a lawsuit by the right holder, an expensive and time-consuming process that is usually futile, especially when the client goes bankrupt.
If the creditor claims against the letter of guarantee due to the alleged client’s insufficient performance, the guarantor will investigate the claim and make payment to the creditor under reasonable circumstances. Once this happens, the guarantor will require the principal to repay the claim and any related expenses.
Therefore, the covered bond is not an insurance policy, but a credit arrangement. When purchasing secured bonds, the principal basically arranges short-term loans to the guarantor under the condition of insufficient performance.
This is one of the reasons for the thorough review of the guarantee application; the guarantor wants to ensure that the client can meet any claims that the guarantor may need to pay.
Therefore, the guarantee is a valuable tool to guarantee the performance of the contract, but there are many Other types of covered bonds, called commercial covered bonds, are usually divided into three categories:
license and license bonds, which are required by the government before issuing a license; court bonds, such as bail bonds and trust bonds; As well as government official bonds, bonds issued to ensure that elected and appointed public officials (such as law enforcement officials and financial officials) perform their duties faithfully and honestly.
Bonds that do not fall into these categories, such as bonds that guarantee self-insurance, can be appropriately classified as “miscellaneous” commercial secured bonds.
You can also read the full article from the Mortgage Affiliate Program while living on this topic,