Bank Guarantee Versus Letter Of Credit
Surety Bonds
Performance and payment bonds are usually issued on an unsecured basis and are usually provided on the construction company’s financial strength, experience, and corporate and personal indemnity. The issuance of bonds does not diminish the contractor’s borrowing capacity and may be viewed as a credit enhancement.
Bank Letters of Credit
Specific liquid assets are pledged to secure bank LOCs. Bank LOCs diminish the contractor’s line of credit and appear on the contractor’s financial statement as a contingent liability. The contractor’s cash flow in funding initial stages of construction and retention amounts throughout a contract term can be adversely affected.