Use the potential of insurance guarantees

The development of enterprises needs increasing working capital. Insurance guarantees fulfil that requirement because they can replace other collateral, credit limits or bank guarantees, unlocking financial resources.

This type of financial product is popular due to its impact on improving liquidity. Guarantees enable entrepreneurs to satisfy financial security requirements with concluded contracts or fulfil concession, customs, tax or excise obligations without freezing their capital. In practice, they are used in Poland by large construction companies, shipyards, petrochemical companies, enterprises implementing armaments contracts, and small entities that submit offers in local tenders.

Companies can employ many solutions, depending on the purpose of their conclusion and needs. The insurance market proposes the following guarantees:

• bid bonds, which replace the necessity to pay a cash deposit in tender procedures,

• due performance, secure the proper implementation of the contract,

• warranty, secure the scope of obligations related to the removal of defects and faults,

• return of the advance payment, secure settlement of the amount transferred by the investor towards the implementation,

• customs, tax and concession obligations, significant for importers and entities from the fuel industry,

• payment of rent, for entities renting space for business purposes,

• environmental, to fulfil obligations towards state authorities by landfill managers,

• payment, obliging the insurer to pay the amount if the secured company fails to fulfil this obligation,

• payment for participants of the renewable energy sources market (PPA Agreements – Power Purchase Agreement),

• and many others, according to the needs of specific industries and clients.

Insurance guarantees may be a more attractive solution than banking products. Firstly, the cost of issuing them is often much lower. Large enterprises can count on a price of 1% of the total insured value per year. In the case of the small and medium-sized enterprise sector, it is usually over 2%. Their second significant advantage is that issuing insurance guarantees does not burden credit lines. Thanks to this, organizations may use the bank lines of credit to meet their cash requirements, which is particularly important regarding liquidity.

In the process of applying for a guarantee, insurers analyse the company’s financial condition and details of the contract to be secured. An essential assessment element is also the company’s long-term development strategy. To build an insurance guarantee program, it is worth using the services of an experienced insurance broker. Thanks to the knowledge and understanding of the market, he can offer beneficial solutions. The broker will help you negotiate attractive warranty terms and support preparing and negotiating individual guarantees.

In addition, some brokers, including EIB, provide companies with an IT system for managing their guarantee lines, which includes, among others, an online tool for checking your warranty limits, checking issued and received guarantees, calculating fees for granting them, along with the possibility of inferring and estimating changes in limit amounts based on issued guarantees. It will also remind you about expiring warranties and allow you to find the issued warranty easily. In the era of digitalization, this is a crucial area.

Bartosz Tokarski, Financial Practice Leader at EIB SA

Last Updated on April 4, 2024 by Anastazja Lach