A Better Choice for ACOs Taking Downside Risk
If you are an ACO and need to securitize your downside risk, here are six reasons why a Surety Bond is a better choice than a Letter of Credit (LOC):
- Credit capacity: An LOC ties up the company’s credit capacity, thus reducing financial flexibility. Surety bonds are not credited against a company’s bank line.
- Covenants: Banks may place restrictive covenants on the client in return for extending a bank line of credit, or they may require extensive financial reporting. Surety companies typically offer more flexibility.
- Security: Banks may choose to take a security interest in the client’s assets. This security is required to be perfected through the filing of public documents (UCC filings) that publicize their secured lender status. A surety is generally an unsecured creditor and a UCC filing is rarely made.
- Default defenses: A bank LOC is a demand instrument; a surety bond typically is not. An LOC may be drawn down at any time, without any reason; the company has no defenses. With a surety bond, the surety requests proof of a company’s default from the obligee and works with the principal to identify defenses. This protects the principal from the obligee taking possession of the bond proceeds without merit.
- Claim handling: the surety typically has a professional, dedicated claims staff available to handle disputes and to assist in the claim resolution process. Banks do not have a claims staff, which requires a client to resolve disputes on its own.
- Rates: LOC rates can be volatile: the LOC rate may include a commitment fee or utilization fee, as well as issuance fees, in addition to a stated rate. Surety rates tend to be stable and are directly tied to the credit quality of the principal and to the types of obligations bonded.
Need help securing your repayment method? Call Chuck Newton today for a no-obligation quote at (804).647.8360 or contact us here.