Cash is king! A familiar phrase in finance. Along with the well-known ways to create liquidity in your company, like banking lines, pre-payments and the use of equity. A less familiar way to generate cash is the use of guarantees issued by an insurance company also known as a Surety. Maybe not well known, but a very efficient way to generate cash and create additional liquidity. Let’s introduce the world of guarantees and how they can benefit your business.
Guarantees generate cash
The use of guarantees issued by an insurance company also known as a Surety is very efficient to generate cash and create additional liquidity.
How can guarantees free cash?
Guarantees are often issued by companies using the existing banking facilities. In the meantime blocking the cash available in those facilities or using securities/collateral that otherwise could serve as a pledge for other financing options. The other common option to issue guarantees is to setup a separate guarantee facility with your bank. This setup is not always in favour of your cash position either. Although such a guarantee facility is not part of the RCF/cash facility, it still puts pressure on the banks overall exposure on your company and therefore limits the capacity of a bank to provide your company with the necessary funds.
There are ways to prevent this ‘cash blocking’ in your company. Like using a Surety to issue your guarantees. A Surety can act as your financial partner next to the bank. It doesn’t block your banking headroom and requires no collateral in any form. Which immediate creates extra financial room. A Surety relies on the track record, the balance sheet strength and/or performance of the company and not on the securities provided.
But there is more to like. Sureties have dedicated and specialized guarantee desks. So you benefit from swift service, fast issuance of guarantees, a large international network for local issuance and knowledge, topped off with a high credit rating that helps in the acceptance of the guarantee by the beneficiary.
How and when to use guarantees?
Now let’s discuss some real live examples of how to use guarantees from Sureties to your companies benefit:
Advance payment
A Dutch machine equipment manufacturer was looking for new funding partners to help the company with its working capital needs. The company is engaged in large international projects and although it’s clients are prepared to make pre payments they ask for a guarantee in return to secure a financial compensation if the manufacturer does not deliver the machine they ordered. Such a guarantee can be issued under the existing bank lines of the client. However the bank usually blocks the received cash equal to the amount of the guarantee. Leaving the manufacturer with a working capital challenge for the production of the machine. Here a Surety can help by issuing the guarantee directly to the customer without the blocking of cash/securities of the company.
Supplier payment
A B2B retail company that also sells seasonal products (i.e. chocolate during Christmas) encounters the cashflow issue that it has a high purchase volume a few months before the holiday season that needs to be paid upfront towards the supplier. By providing a supplier payment guarantee from a Surety towards the supplier the B2B retail company manages to postpone the payment to the supplier until after the holiday season without blocking any cash at their bank and providing the supplier enough security to supply the goods.
Customs
Logistics companies frequently deal with customs obligations when handling goods. For these obligations you have the possibility to provide a customs guarantee that enables these companies to postpone their customs payments with 30 days or more. Customs obligations are also common within the chemicals and oil storage sector. In these segments there is usually a high investment need that requires significant financing. Several storage companies have therefore chosen a Surety to cover their guarantee need to optimize and increase the financing possibilities of their investments at their banks.
Maintenance
Within the manufacturing segment and in construction it is common to have a maintenance period on the product (machine, element or building) that is delivered. In many cases the client is allowed to delay the final 5% payment until the maintenance period is finalized. With a maintenance guarantee you are able to collect the final 5% payment at the start of the maintenance period which helps in your cashflow.
Deferred equity contribution guarantee
The usage of a guarantee is a good cashflow tool in acquiring a company. For several clients we issued Deferred equity contribution Guarantees to postpone part of the acquisition sum. The advantage is that the buyer and seller can agree upon a transaction price that has performance elements in the future without the risk for the buyer that too much cash is paid upfront if these performance elements are disappointing. The seller has the advantage that nonpayment is covered with a on demand guarantee.
Payment guarantee
In line with the Deferred equity contribution guarantee, it is possible to postpone payments with a payment guarantee for i.e. purchase of a plot when awaiting the required permits.
Court guarantees
When you do business, it could happen that there is a dispute with governmental institutions (i.e. tax office or customs) or other companies. In some cases, a deposit is required before or during the court case. These deposits could impact your cashflow significantly. A possible solution would be to use a court guarantee to secure the deposit without impacting your short term cashflow.
Important notice: Sureties are not able to provide a guarantee to cover the obligations under a finance or lending obligation (i.e. interest and repayment obligations).
It is however possible to include a pledge clause in the wording of a guarantee that in case of a claim the claim amount is transferred to a 3rd party account of the bank. In this case the bank could consider additional financing for the beneficiary (your client).
More information about our guarantees?
By choosing Allianz Trade for your guarantees, you are opting for:
Do you need a guarantee or do you want more information ? Contact us.