Surety Bond vs. Letter of Credit
Surety bonds and letters of credit are similar in many ways. Both are three-party agreements in which one party pays a neutral guarantor to provide a financial guarantee of an obligation. A contractor may have the choice between a surety bond and a letter of credit when signing the contract for a project.
Remember, there are several important differences between a surety bond and a letter of credit. These differences help illustrate why a surety bond is often a better choice for contractors than a letter of credit.
Banks will often impose additional terms and collateral requirements on letters of credit. Surety bonds on the other hand feature more flexible terms and, for contractors with credit problems, getting a surety bond with bad credit is often easier than getting a letter of credit.
For letters of credit, banks will frequently charge hidden fees on top of the other costs of obtaining a letter of credit. Surety bonds written by reliable surety bond producers generally have smaller fees or none at all on top of the surety bond premium.
In some cases, a letter of credit may still be the appropriate choice, or a project owner may insist on a letter of credit rather than a surety bond. According to Surety Bonds Direct, surety bonds are a smart choice for contractors.