Your company wins a tender, and the contract requires you to provide performance security for a set share of the contract value. It is a familiar situation in construction, road building, IT services, supply contracts and almost any industry where the client wants certainty that the work will actually be completed. Traditionally a bank provides this security, but more and more companies choose guarantee insurance, which does the same job without tying up their money.

Guarantee insurance is, in essence, a surety issued by an insurer to your client. If the company fails to meet its contractual obligations, the insurer pays the client compensation up to the amount stated in the guarantee. For the company this means the ability to bid for tenders and sign large contracts without freezing working capital or reducing its bank credit limit.

Types of guarantees and when they are required

In practice four types of guarantees are used most often, and they follow the life cycle of a contract. A bid or tender guarantee confirms that the bidder is serious: if the company wins the procurement but refuses to sign the contract, the client receives compensation. An advance payment guarantee protects a client who has paid money up front: if the work never starts or the advance is not worked off, the money is returned.

The performance guarantee is the most frequently requested of all. It covers the client against losses if the contract is not fulfilled at all, or is fulfilled poorly or late. The fourth type, the warranty period guarantee, starts working after handover: if defects appear during the warranty period and the contractor does not fix them, the client has financial security to have them fixed.

Who needs this? A construction company running several sites at once, each requiring its own performance guarantee. A manufacturer or supplier that receives an advance to buy materials. An IT company whose contract includes a support period lasting several years. In each of these situations a guarantee makes a deal possible that would otherwise demand a substantial cash reserve.

The guarantee amount is usually expressed as a percentage of the contract value, and the exact figure is set by the client in the contract or in the procurement terms. The validity period also follows the contract: a performance guarantee runs until handover, while a warranty period guarantee covers the whole warranty term. In public procurement the security can usually be provided either as a bank guarantee or as a guarantee policy issued by an insurer, and both give the client equivalent protection. Before submitting a bid, always check the required form, amount and validity period in the tender documents.

Guarantee insurance or a bank guarantee: which to choose

The most important difference lies in cash flow. A bank guarantee usually reduces the company credit limit or requires collateral, which means it ties up funds that could be working in the business. Guarantee insurance normally requires no collateral: the insurer assesses the company financials and takes on the risk in exchange for a premium. For a business running several projects at the same time, this means the ability to bid for more tenders without hitting a credit ceiling.

Arranging a guarantee is simpler than many expect. The insurer reviews the company financial statements, its track record on similar projects and the terms of the specific contract. The more stable the figures and the cleaner the delivery history, the better the terms. The price also depends on the guarantee amount and its duration. For a first guarantee, expect to submit annual reports and contract details; repeat guarantees for the same client are usually issued much faster. A practical tip: start the process as soon as you know a guarantee will be needed, not a few days before the contract signing.

One more thing deserves attention: what happens when a claim is made. If the client submits a justified claim, the insurer pays the compensation, but then turns to the company with a recourse claim. A guarantee is therefore not insurance against your own failure to deliver; it is an instrument that gives the client security and gives your company access to contracts. This also explains why the insurer examines your finances as carefully as a bank would.

Guarantee insurance does not replace the rest of your business cover. It secures contractual obligations, but damage caused to third parties falls under civil liability insurance, and unexpected damage to assets under a property policy. Full protection usually means a combination of instruments matched to the way the business operates.

When comparing insurers, look beyond the premium: check the speed of issue, the documents required and the terms offered for repeat guarantees. A broker saves time here, because one application lets you compare offers from several insurers and pick the one that fits the specific contract.

If your company is preparing for a tender or a client is asking for security, guarantee insurance is often the fastest and most cash flow friendly solution. The specialists at Agento.lv will help you choose the right type of guarantee, compare insurer terms and prepare the documents. Get a free consultation and an advisor will contact you within one working day.

Frequently Asked Questions

What is guarantee insurance? It is a surety issued by an insurer to your client: if the company fails to meet its contractual obligations, the insurer pays the client compensation up to the amount stated in the guarantee. For the company it is an alternative to a bank guarantee.
How does guarantee insurance differ from a bank guarantee? The main difference is cash flow. A bank guarantee usually reduces the credit limit or requires collateral, while guarantee insurance normally requires none, because the insurer relies on the company financial indicators.
What types of guarantees can be arranged? Four types are used most often: a bid or tender guarantee, an advance payment guarantee, a performance guarantee and a warranty period guarantee. They follow the contract life cycle from bidding to the end of the warranty period.
Is guarantee insurance accepted in public procurement? Usually yes. In public procurement the security can most often be provided as a bank guarantee or as a guarantee policy issued by an insurer. The exact requirements are always stated in the tender documents.
What happens if the client makes a claim against the guarantee? In the case of a justified claim the insurer pays the client compensation and then turns to the company with a recourse claim. The guarantee protects the client; it does not release the company from its obligations.