There are three different types of Bonds available when a developer wishes to transfer obligations and responsibilities of new road and sewers to the Local Authority or Water Company. These include; Surety Bonds, Cash Bonds, and Bank Bonds, all of which serve as a financial guarantee to the adopting party.
In this article, we will take a look at the differences between Cash Bonds and Surety Bonds.
What Is A Cash Bond?
A Cash Bond is a very common form of Bond for developments and developers. With a Cash Bond, the developer provides the local authorities with a cash deposit. This deposit is then held by the local authority or water company and only released upon both adoption of the road or sewer and bond cancellation.
This means that developers pay a large sum of money upfront to the council as collateral to ensure the road or sewer is built to an acceptable standard. In the event of non-performance or insolvency of the developer, the monies held by the council can be utilised in order to build/finish the road to the agreed-upon, adoptable standard.
Benefits Of Cash Bonds
While Cash Bonds restrict and tie up vital working capital for a sustained period of time, they do have some benefits, including:
Market support – In some instances, Bank Bonds and Surety Bonds may not be available in the market, owing to the client’s financial strength.
No initial upfront bond fee required – Cash Bonds negate the need to pay an initial bond fee to either a bank or surety provide. However, as detailed further in the blog, placing a cash bond does restrict the vital working capital of a developer.
Protection For Local Authorities & Water Companies – Cash Bonds are a way of providing easily accessible and liquid protection for the local authority/water company, who can access and draw down on the funds at any point.
What Is A Surety Bond?
A Surety Bond is a financial guarantee between a developer and a guarantor that provides local authorities and water companies with the financial comfort that the road or sewers will be constructed in accordance with the agreed standards and specifications .
If the development is not completed to an adoptable standard, then the Bond will be used to cover the costs associated with bringing the road or sewer to the specified, agreed, and adoptable standard. It also provides the bond beneficiary with protection in the case of a developer becoming insolvent and therefore cannot complete the works
Benefits Of Road & Sewer Surety Bonds
There are many benefits that are associated with choosing a road and sewer surety bond. These benefits include, but are not limited to;
Minimum Upfront Cost – Unlike Cash Bonds, Surety Bonds often do not require a significant cash collateral deposit, which means that they come with less upfront costs in comparison to a cash bond. This alleviates the initial working capital outlay, freeing up cash for the developer.
Protection For Local Authorities & Water Companies – One of the main benefits of Surety Bonds is that they offer complete financial protection to local authorities and water companies. If the work is not completed to the adopting party standard the bond can be utilised to cover the costs of the work to bring it to an adoptable standard.
The Only Option – Sometimes, Surety and Bank Bonds are the only solution if the developer doesn’t hold the monies of the cash collateral amount that the local authority or water company is requesting. Surety Bonds allow developers to transfer the legal obligation to the council, preventing the roads from remaining private, which can hinder the sale of units on site.
What Are The Main Differences Between Cash Bonds & Surety Bonds
Cash Bonds restrict and tie up vital working capital, whereas Surety Bonds don’t, and they normally require a significantly higher upfront cost. Surety Bonds require very little upfront investment, whereas Cash Bonds require a much larger upfront sum of money that the local authority or water company will hold until the Bond cancellation and adoption have been achieved.
While these initial costs may not be a problem for bigger developers, SMEs need all of the working capital that they can get in the event of unforeseen circumstances, which require capital, especially in today’s economic climate, whereby construction costs continue to rise.
Cash Bonds typically do not require the need of third-party involvement. Cash Bonds can be placed directly with the council, unlike Surety Bonds, which require an independent guarantor.
Cash Bonds Vs Surety Bonds: Which Is Best For Your Business?
If, as a business, you are cash-rich and have large amounts of working capital, a Cash Bond may be a favourable solution. However, with rising supply chain costs and increasing financial pressures on households, saving for a deposit has become more difficult — making it harder for housebuilders to sell plots.
Surety Bonds can offer increased financial resilience to developers as it allows them to retain working capital, which can be used for the building and construction of residential developments.
Road & Sewer Surety Bonds From The UK’s Only Road & Sewer Bond Specialists
Here at RS Bonds, we are proud to be the only company within the UK that specialises solely and exclusively in the procurement of road and sewer bonds. We also have a guaranteed zero cash collateral policy. Get in touch today on 0161 518 9616 to find out more, or fill out our online Free Quotation form to start the process.
